Efficiency and the Disposition Effect in NFL Prediction Markets
Samuel M. Hartzmark
University of Chicago - Booth School of Business
David H. Solomon
University of Southern California - Marshall School of Business
January 21, 2010
Quarterly Journal of Finance 2 (3), pp 1250013, September 2012.
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.
Number of Pages in PDF File: 51
Keywords: Disposition Effect, Prediction Markets, Behavioral Finance, Behavioral Decision Theory
JEL Classification: G12, G14
Date posted: January 24, 2010 ; Last revised: June 28, 2014