Efficient market hypothesis
The so-called efficient market hypothesis has fallen out during the last decade. Many experts leaned to an idea about people not being good at pricing things efficiently, especially in non-random, fully rational markets (like betting). One of the main reasons for that is bettors and people, in general, are not really good at evaluating big and small probabilities. This trend could be seen in betting when people overestimate/underestimate the possibility of the underdog/favourite, betting too much or too little money on a certain selection. This raises the concern about biases that force this, which are usually called favourite-longshot.
Hot hand fallacy
The false evaluation and misconception of probabilities is not the only thing that limits bettors. The market is also getting exposed to another systematic bias called the hot hand fallacy.
The false assumption is created in the moment of extended streaks and/or repetitive patterns. People tend to underestimate these, believing (wishful thinking
) such streaks will only prolong but not come to an end.
The hot hand fallacy was mentioned for the first time back in 1985 when Amos Tversky, along with his colleagues, explained the people's attitude towards understanding the chance, on the example of basketball. They found out that most of the population, generally, think that every consecutive measurement will not be closer to the mean, as the regression to the mean theory states. However, the principle does not state that things MUST return to the average, instead, they only tend to do so (the law of large numbers). Downs are usually followed by ups and vice versa. People misunderstand the hot-hand replacing the concept of "what's hot is going to cool down" with "what's hot is going to stay hot".
Hot-hand in football betting
Whenever the football team goes on the winning streak punters always notice it. This attention results in more money being placed on the "hot" side, decreasing its value. Such a scenario usually results in the winning streak to come to an end.
There are more things that influence winning streaks. Sometimes bettors do not take those into consideration, overestimating the teams' chances of succeeding. This misconception is called the hot hand fallacy. Bettors look at the hyped-up candidates and forget about the role of luck in their streak. This creates biases that push punters to make the unweighted calls. Derived from such an example, we can say that situations that involve a large share of chance (luck) are expected to be moving towards the mean value more often and at a higher pace.
To sum up, general practice shows, that "hot" teams on the winning streak are more likely to lose than tipsters believe, meaning the market gets wrongly verified, resulting in the odds representing the untrue value. The same could be seen with the "cold" teams. They are mainly getting ignored by the market, which results in higher prices. Many would look at this option as at the unattractive one. That is where experienced punters make the difference. Looking at this situation and understanding where it is coming from is very crucial. Based on the hot-hand fallacy phenomenon, such "cold" teams are likely to start winning and give bettors tons of value.
The profitability of "hotness" and "coldness"
To find out the results of the hot-hand hypothesis, we, firstly, have to find the so-called "heat" and "cold" value. You would need to utilise one of the mathematical methods in order to find it. We are not going to get too much into the mathematical aspect of it. Still, the key here would be to find the true value of the team, meaning without the bookmaker's margin.
Well, to find out if the hand-hand actually works, you have to find the data to test it on. Our suggestion would be to use historical data from the top European football leagues like the Premier League, La Liga, Bundesliga, Seria A, etc. By analysing the matches from those leagues, we can test how effective is our hypothesis.
If you would go over the proposed sample, you should get the total turnover of just barely over 100%, meaning you would break even in the long-run. Still, your profits would not be too significant. Now, you would break down the "hot" and "cold" teams, you should get a bit of better picture. In such a case, you hotter teams will show a bit lower returns somewhere in high 90's, in contrast, the colder teams would give a better than the total return result. Which already suggest that "cold" teams are highly biased by the hot-hand fallacy.Experimenting with the "hotness" value can give way more than what we have just outlined. You can conduct a more-precise test or narrow down your criteria. It is all up to you. However, the general trend will show a greater overall return on the "colder" teams.
Do not also forget that for the experiment purposes, we were using the true market value (margin excluded). In reality, such a scenario is highly unlikely to happen, as bookies do not really practice that. Another thing that might affect your actual results is that fact that bookmakers like to restrict winning customers quite often. Well, further development of the conducted test could lead you to making profits even with applied restrictions, paying more attention to "coldest" teams.