- Wisdom of the Crowd refers to the phenomenon that a large number of individuals in a group, will usually be able to make better decisions than any individual in that group.
- For example, at a funfair say their was a big jar with an unknown amount of marbles. People were asked to guess the number of marbles (with the closest getting a prize). If you took all the guesses and averaged them (provided there was a sufficient number of people in the group) it would usually come close to the actual number of marbles in the jar. Obviously, the more people who participated the closer to the actual number you would get.
- This happens, because individual noise is filtered out.
- In the case of betting odds, Wisdom of the Crowd also has an effect as bookmakers are forced to lower prices getting a lot of betting action (and increase prices not getting a lot). So, highly backed outcomes get their prices lowered, and less well back outcomes get their prices increased.
- However, for Wisdom of the Crowd to work people have to be making rational and independent decisions. In the case, of marbles in the jar at the funfair this may be the case. In the case, of betting markets this may not be the case.
- In a competition, where a large number of people bet for fun as an ‘one-off’ rather than a competition that attracts regular bettors, certain prices can be distorted. Perhaps the best example of this is the Grand National. Many people place a bet for the only time in the year, on this event, as a tradition. Many will be picking horses based on just the name of the horse (for example the name means something to them, for example a colour mentioned in the name of the horse relates to a team they support in some sport). They will not have considered whether the odds offer value, and will back the horse regardless of whether it’s at 35-1 or 25-1! This means the prices of horses which contain colours or names that may be related to popular football teams may be much shorter than their true probabilities. Again, people may be being swayed to support a horse due to irrationality (due to a colour mentioned in the name of a horse), and/or not independently (just betting on a horse because their mates are doing so too).
- For international competitions, where there is a home team playing, the home team’s price (at bookmaker who only or mainly accept bets from UK customers) of winning a particular match may be lower than their true probability would suggest. This may also apply to any markets the home team is involved in, such as Tournament Winner or Top Goalscorer. England to win the football World Cup, often is offered at a shorter price than that true probability would suggest (at UK bookmakers). To see this for yourself, have a look at the prices offered by say a bookmaker only accepting bets outside the UK (if that bookmaker only accepts bets from their country where football is a popular sport, you may see the same phenomenon). People may be betting irrationally. (due to patriotic support for the home team, regardless of the prices), and not independently (believing their teams chance are higher than they are due to hype in the press, or among their social group).
Remember this, when placing your bets at your favourite bookmaker. Remember, if some prices become too short, others will often become better!