Bettors don't regress to the mean enough, investment firm claims

An investment firm has a Super Bowl prediction method that they think can beat the spread, according to this Bloomberg story.

The firm, Analytic Investors LLC, does this: for each of the NFL's 32 teams, they figure out how much money you would have made betting that team during the regular season (betting them outright, it appears, not betting them against the spread).

In 2011, betting the 49ers would have generated an investment return of 52.9 percent this year (I don't know how that's calculated, but that's all they say), making them the team with the highest "alpha". The Colts were the worst, at minus 57.6 percent. The Giants were +32.3 percent, and the Patriots +16.1 percent.

For the Super Bowl, the method says, you should bet on the team that returned the least during the regular season. That's because you should avoid the team with the higher return, because bettors who made more money off their team are "overreacting to information."

"[The Giants] have been the hotter team. They are like the cocktail party stock that everyone’s talking about, that some people have made a lot of money on.”

OK, fair enough. But ... is there evidence that this works? The article doesn't give any, except to say that it's beat the spread for the last eight consecutive Super Bowls. That doesn't mean much, of course, since nobody's claiming the system is accurate enough for eight in a row to be expected.

(Suppose the method predicts with a 60% success rate, which seems way optimistic. Then the chance of 8 in a row is around 1 in 60. At 50%, the chance is 1 in 256.)

This is probably just a publicity stunt to get some exposure for the firm. But it seems like an interesting hypothesis to check out. If a team outperforms expectations during the regular season, it probably did so by luck. And, it seems reasonable to suggest that maybe bettors misinterpret that luck as skill, and overweight the team's future chances.

You'd need a bigger study, of course. Suppose every year you looked at the last three games of the season, for the top 6 and bottom 6 teams in terms of "alpha" in the earlier weeks. That would give you maybe 25 games a year, 500 games over twenty years, 250 games for each group. Worth a shot. I don't have NFL data or betting line data, but I'm sure someone out there does.



Hat tip: Freakonomics