Pinnacle closing odds, market efficiency and Tipsters’ skill

In the last months “Beating the Pinnacle closing lines” has being a recurrent topic of discussion in the betting landscape. As the betting analyst Joseph Buchdahl has proved in his great book “The Science, Psychology & Philosophy of Gambling (Squares & Sharps, Suckers & Sharks)” and other betting articles, Pinnacle closing odds are the most efficient lines. Joseph states that “according to the efficient market hypothesis, the closing odds provide the most efficient or most accurate representation of the probabilities of actual results, since they reflect the most amount of information expressed in the form of wagers by the betting public”. I do obviously agree with this statement, as it could not be otherwise, but I think some bettors who follow tipsters are drawing some wrong conclusions out of it. I have read categorical assertions stating that those who do not beat the closing lines, those whose yield to the closing price is negative (having previously removed the Pinnacle margin) are not genuine skilful bettors. In this article about the “Wisdom of the Crowds” Joseph presents the different ways of removing the bookie margin.

I am sure the yield to the closing line is a factor to consider that could improve the analysis of tipsters. In general, we can affirm that those tipsters who have a positive yield to closing odds in a sufficiente large sample, are able to predict odds prematch movement, are able to predict which odds will get lower  However, having said that, I also think many are considering the Yield to Pinnacle closing lines as the holly grail, as the only way to measure a tipster’s skill, without giving any importance to the tipster’s real yield. In fact this is the same as saying that any bet placed near the market close has a negative expected value, similar to the bookie margin; it’s like throwing away your money, as the market at that moment is totally efficient. And I have to disagree with this “absolute truth”, with this “strong efficient market theory”, for several reasons:

1. Yes, the “closing lines” are, ON AVERAGE, the most efficient prices, the odds that more accurately represent the fair implied probability of events. But this is completely compatible with the fact that there can be bettors who are able to find and select some closing prices that might not represent the “true” probability. As Joseph Buchdahl proves in this article, opening odds are, although not as efficient as closing odds, very efficient too. And we all now that many punters are able to make a profit at opening odds. Obviously, it’s more difficult to find inefficient odds at the close, but… who can affirm that a tipster who tips near the market close and who has a great track record in terms of number of picks and yield, has achieved that performace only due to luck? To sum up, that closing odds are the most efficient ones ON AVERAGE doesn’t imply that all of them represent the true probabilities and therefore that no one can take advantage.

2. In my opinion we cannot compare the market efficiency theory in the financial markets, where most of the money trades comes from institutional investors, with the betting market, where most of the money traded comes from recreational bettors, who base their betting decisions on things that are quite far away from rationality and that have more to do with their “feelings”. That is, if even in the financial markets Behavioral Finance studies have proved that investors decisions aren’t rational and therefore the market efficiency is quite questionable, what can we say of the betting markets, where the percentage of bettors taking irrational decisions is likely much higher.

3. On average closing odds are efficient because there is smart money out there balancing the bets of dumb money of the more recreational bettors. Shouldn’t it be for the smart money, closing odds would be probably very inefficient. My point is that many times the flow of this dumb money into the market is so big that odds cannot be balanced by the smart money, what creates inefficient closing odds. I’m sure many of you reading this article have seen several times certain odds at the market close that you were convinced were far from efficient.

4. Sometimes we can see late sharp odds movements, even in liquid markets, that are not justified by any fresh piece of new flowing into the market. That is, when we see a 1.90 price available 5 minutes before the kick off moving to 2.0 at the close without any news coming out…. Do you think that the 2.0 price is more efficient than the 1.90? I don’t think so.

5. The market close is the time of maximum efficiency because all the public information is over the table and therefore odds adjust based on that info. However, in my opinion, it’s not only the possession of the information what makes a punter or tipster being skilful. It’s the way they interpret that info what makes some of them stand out on the rest. There are many great sports journalists, with access to the best information possible, who have tried as tipsters with disastrous results. I am sure there are many tipsters who can have in their hands a positive profit expectancy even if they tip at market close prices, because they excel at valuing the information they possess. The possession of the information is a necessary but not sufficient condition to win money in the long run. It’s the analysis of that info what makes the difference.

If we believe that the closing price doesn’t always represent the true price, theoretically and having previously removed the Pinnacle margin, we can decompose the ROI a bettor is able to achieve in 2 factors, the ROI from the tipped price to the closing price and the ROI from the closing price to the “true” price:

Real ROI = (1+ROI from tipped price to closing price) x (1+ROI from closing price to true price) -1

Let’s give an example. A tipster tips at 1.92 and the closing odds are 1.85. Now, let’s assume that the true odds are (having removed the Pinnacle margin) 1.80. The ROI expectancy of this bet is:

(1.92/1.80-1) = 6.67% = (1.92/1.85) x (1.85/1.80) -1 = (1+3.78%) x (1+2.78%) – 1

The ROI of those tipsters who normally tip near the market close will be basically the ROI from the close price to the true price. Those tipsters could normally tip some hours in advance and achieve better results but they don’t do it because they prefer to provide their clients with picks with a lower “paper-value” but a higher “real-value”, as they take into account the liquidity offered by the bookie.

To sum up, I do think it’s important to consider the yield to closing odds when analysing a tipster’s record. In fact we are planning to introduce this factor in our Rating at Pyckio in the future. Our Rating now takes into account the factors yield, yield level stakes, number of picks, volatility and liquidity of the market. A t-test for statistical significance is behind it. Unfortunately, isn’t that easy to gather all the closing lines of the more than 6 Million picks our tipsters have submitted into our platform and match them into every pick, but this is something we hope to incorporate one day.

I do also believe that on average tipsters who beat the closing lines will generally make it better that tipsters who don’t do it. But this is very different from affirming that tipsters who don’t beat the closing lines are definitely something to avoid. I’m convinced there are tipsters who are able to select positive expectancy bets at closing or near-closing odds that do not reflect the true probabilities. Obviously, the longer the track record where the bettor/tipster real yield differs from the yield to closing odds, the more likely it is that the tipster is able to provide with a long term positive expectancy ROI.