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7. Modeling the Payoffs

Economists are very concerned with the concept of market efficiency. Markets are efficient whenever prices reflect underlying values. Market efficiency implies that everyone has the same information about what is available, and processes it correctly.

The question of whether the jai-alai bettors market is efficient goes straight to the heart of whether there is any hope to make money betting on it. All of the information that we use to predict the outcome of jai-alai matches is available to the general public. Since we are betting against the public, we can only win if we can interpret this data more successfully than the rest of the market. We can win money if and only if the market is inefficient.  

Analyzing market efficiency requires us to build a model of how the general public bets. Once we have an accurate betting model, we can compare it with the results of our Monte Carlo simulation to look for inefficiencies. Any bet which the public rates higher than our simulation is one to stay away from, while any bet which the simulation rates higher than the public represents a market inefficiency potentially worth exploiting.

The issue of market efficiency rears its head most dramatically in the stock market. Billions of dollars are traded daily in the major markets, by tens of thousands of people watching minute-by-minute stock ticker reports. Quantitative market analysts (the so called ``quants'') believe that there are indeed inefficiencies in the stock market, which show up as statistical patterns. Companies like D. E. Shaw and Renaissance Technology hire large teams of people with training like mine to do analysis to find such patterns to invest in and exploit.

But are these patterns really present, and are they large enough to exploit? Many knowledgeable people believe that the behavior of the stock market is essentially a random walk, that is totally unpredictable. If so, it means these market inefficiencies don't really exist. And if they exist, they may not exist for long. The quants have taken their beatings along the way.   

Why should the situation be any different in jai-alai than the stock market? My sense is that the average dollar in the jai-alai is less informed than one that is invested in the stock market. I have never seen anyone hanging off the railing at the New York Stock Exchange, yelling ``You suck, ATT!'' or ``Miss it, TXN!''. If the average bettor trusts oracles like Pepe's Green Card or knows as little about jai-alai as I did before beginning this study - well, there are bound to be plenty of market inefficiencies. All we had to do is find them.  

I hope you have enjoyed this excerpt from Calculated Bets: Computers, Gambling, and Mathematical Modeling to Win!, by Steven Skiena, copublished by Cambridge University Press and the Mathematical Association of America.

This is a book about a gambling system that works. It tells the story of how the author used computer simulation and mathematical modeling techniques to predict the outcome of jai-alai matches and bet on them successfully -- increasing his initial stake by over 500% in one year! His method can work for anyone: at the end of the book he tells the best way to watch jai-alai, and how to bet on it. With humor and enthusiasm, Skiena details a life-long fascination with the computer prediction of sporting events. Along the way, he discusses other gambling systems, both successful and unsuccessful, for such games as lotto, roulette, blackjack, and the stock market. Indeed, he shows how his jai-alai system functions just like a miniature stock trading system.

Do you want to learn about program trading systems, the future of Internet gambling, and the real reason brokerage houses don't offer mutual funds that invest at racetracks and frontons? How mathematical models are used in political polling? The difference between correlation and causation? If you are curious about gambling and mathematics, odds are this is the book for you!

This book is available in both hardcover and paperback.

next up previous index
Next: Parimutuel Wagering Up: Excerpts from Calculated Bets: Previous: Jai-Alai Players and Baseball
Steve Skiena