Efficiency and the Disposition Effect in NFL Prediction Markets

Abstract

Examining NFL betting contracts at Tradesports.com, we find mispricing consistent with the disposition effect, where investors are more likely to close out profitable positions than losing positions. Prices are too low when teams are ahead and too high when teams are behind. Returns following news events exhibit short-term reversals and longer-term momentum. These results do not appear driven by liquidity or non-financial reasons for trade. Finding the disposition effect in a negative expected return gambling market questions standard explanations for the effect (belief in mean reversion, prospect theory). It is consistent with cognitive dissonance, and models with time-inconsistent behaviour.

Keywords: Disposition Effect, Prediction Markets, Behavioral Finance, Behavioral Decision Theory

JEL Classification: G12, G14