Efficiency and the Disposition Effect in NFL Prediction Markets

Quarterly Journal of Finance 2 (3), pp 1250013, September 2012.

51 Pages Posted: 24 Jan 2010 Last revised: 28 Jun 2014

Samuel M. Hartzmark

University of Chicago - Booth School of Business

David H. Solomon

University of Southern California - Marshall School of Business

Date Written: January 21, 2010

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

Suggested Citation

Hartzmark, Samuel M. and Solomon, David H., Efficiency and the Disposition Effect in NFL Prediction Markets (January 21, 2010). Quarterly Journal of Finance 2 (3), pp 1250013, September 2012.. Available at SSRN: https://ssrn.com/abstract=1540313 or http://dx.doi.org/10.2139/ssrn.1540313

Samuel M. Hartzmark

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

David H. Solomon (Contact Author)

University of Southern California - Marshall School of Business ( email )

Los Angeles, CA 90089
United States

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