Making money on black swans

This season is one of the most unpredictable in AFL/VFL history, blah blah blah. The round just past proved to be another tipster’s nightmare yaddah, yaddah, yaddah. The AFL is to be commended for creating such an even and balanced competition… yawn.

It seems like a week can’t go past in season 2017 without a story or news piece starting in the above manner. It’s great we have an even competition and that on any given day any team can win, but so what?

For me, if it so hard for everyone from your average Joe to famed AFL experts to tip a winner, it must be harder still for the bookies to set an accurate market on games, thus presenting an opportunity for financial gain.

Making money off of volatility or unpredictability is not new in financial markets. One such example is that of the certain types of investors who bet on the occurrence of so called ‘black swan’ events.

Black swan events are anything that falls outside what can be normally expected and so named because, until Dutch explorers stumbled upon black swans in Western Australia in the 1600’s, it was thought that all swans were white.

These investors place bets at the far extremes of the market, day after day and month after month until the day arrives when a black swan moment occurs.

Be it a weather phenomenon or unforeseen political event (Brexit or Trump win anyone) causing large market swings.

When such events do arrive, this type of investor cashes in and more than makes up for all their other prior losses as markets understate the probability of such events occurring.

While Hawthorn beating the Sydney Swans on Friday night wasn’t outside the bounds of possibility, it continued a profitable trend in season 2017.

A popular sports betting wager type is the point’s line. The idea is that to make a game an even money contest – akin to a red or black on a roulette wheel – each team in any given match is given a point’s head start or point’s handicap.

For example, on Friday night the Hawks, as the underdogs, were given a 15.5 point start to make the game a supposed even bet, for the Hawk to pay out on this bet type they had to either win or lose by less than 15.5 points.

The lines are set by a bookies algorithm, built by people who are very very good at math, these models have historically been incredibly accurate.

Over the course of a season, favourites and underdogs have historically finished with a fifty-fifty record against these margin lines. Meaning you haven’t been able to win by just tipping favourites or underdogs each week just like you can’t win at a casino by betting on red or black over a long period of time.

This season though is different, with no truly dominant teams and so much unpredictability in results, there is no computer model in the world that can keep pace and with that, the bookies’ lines have been turned to mush.

Up to and including Friday night’s game, underdogs have won 62 per cent of margin line bets by either winning the game outright or by losing by less than expected.

That at first might not sound like much, but it is an incredible result over such a sustained period for a supposed fifty-fifty proposition and translates to a return percentage of nearly 20 per cent.

If you looked at this over the course of the season you would expect both underdogs and favourites to finish the season square with the margin line ledger.

That is, some weeks they would beat the line, some weeks they wouldn’t, but overall finish close to zero, so far this season, the underdogs are approximately 1,450 points ahead, and conversely, favourites are 1,450 points down.

So dominant is this pattern that seventeen of the eighteen teams have positive records when starting with a point’s head start, with only the Saints bucking the trend.

Over the course of the first eighteen rounds, only five of those rounds has seen underdogs win less than 50% of margin line bets.

Would the bookies be crying poor? I doubt it, just like in financial markets where black swan events are under estimated, so too in the AFL.

It is much easier to envision the Swans led by an all-star midfield and glamour forward line running over a rag tag collection of young and old Hawks, and here, like most games is where the money flowed.

But in season 2017, where unpredictability is the new normal, it is not the smart play.

There will be many hoping for an even and competitive season in the mould of 2017 for years to come.

Fans love the tight games and notion that you can never know what to expect; those at AFL house embrace the additional crowds and ratings, while I too welcome the added excitement it brings to the game I will also be keeping an eye on the bookies to see how they respond.