Essays on bettors' behavior and market efficiency in the college football wagering market

Though the finance literature abounds with papers that test for market efficiency and rational behavior in the context of securities markets, fewer papers have performed these tests with sports betting markets as the setting. Sports betting markets have several advantages over traditional capital markets as an empirical setting, and commonalities with traditional markets allow for useful insights.; The first essay investigates whether irrational bettors affect the spread-formation process in the college market and then tests whether the college football betting market is efficient. This study produces numerous findings consistent with the presence of sentimental bettors in the college football betting market. Predictions made by so-called “experts” appear to cause intra-week changes in spreads, though these experts are random in their ability to predict winners against the spread. Bettors are attracted to teams that have performed well against the spread in the short run, causing spreads to move in the direction of such teams. However, bettors appear to believe that teams' long runs in same-outcome performances will end, so that spreads move away from teams on longer winning streaks and towards teams that are on longer losing streaks. Bettors also seem to exhibit positive sentiment, albeit inconsistently across home and away teams, for prestigious or dubious teams. Despite the apparent presence of sentiment in the market, various betting strategies designed to exploit any sentiment-based distortions in spreads are not found to be profitable, providing economic evidence that sentiment cannot be exploited for profits.; The second essay contributes to the body of direct evidence testing behavioral finance theories; in particular, it provides evidence on market reactions to various trends and patterns in performance data. Whereas previous research finds scant evidence that stock markets react in ways consistent with pervasive representativeness bias, experimental research has found that human subjects behave as if influenced by trends and patterns. I examine this issue by using the football wagering market as my price laboratory. The evidence in this market is mixed. Over long performance horizons, bettor behavior is consistent with that of the experimental subjects; over shorter horizons, investors appear to be focused on whether the most recent outcome confirms or contradicts the prior performance trend. I also find evidence that investors in this market behave in a manner consistent with beliefs in a theoretical model of performance regimes.