Reverse Line Movement in Sports Betting and Information Cascade
The sports betting business is very profitable, making billions every year. How? Well, the premise of the sports betting business is the vig, more colloquially known as “juice.” This juice is a built-in profit margin built into the sports betting line. Given two sides of a bet that is just as likely to win, a sportsbook will likely offer the odds of -110 for each side. What does this mean? A better must wager 110 dollars to win 100 (210 total). So, if a sportsbook got 2 110 bets on both sides, they have effectively netted themselves 10 dollars with no risk. Although uncertainty and gambling can be attractive to the average joe like you or me, sportsbooks are corporations that benefit from guaranteed profit. Thus, they try to do this whenever possible. For example, if a certain side of a 50/50 bet is getting more money put on it than the other, a sportsbook may slowly adjust its odds to entice people to bet on the other side.
To illustrate this, I will present a mock example. Let’s say that the Jets are playing the Patriots on Sunday, and bookmakers have decided that the line should be set at Patriots -5.5 (-110) / Jets +5.5 (-110). This means you can pick on whether the Patriots will win by more than 5 points OR whether the Jets will win/lose by less than or equal to 5 points. However, let’s say that since Zach Wilson (Jets QB) had an amazing game last week, the public is excited to bet on the Jets. Now, 75% of the money is on the Jets +5.5 as compared to 25% on Patriots -5.5. Thus, bookmakers may adjust the Jet +5.5 to -115 and Patriots -5.5 to -105 so that they are able to even out the bets while still getting some juice. In more lopsided cases, the lines could be -120 and +100. In extreme cases, bookmakers may even just move the line so that the Jets have fewer points to lose by (Jets +4.5 / Patriots -4.5) with -110 odds on both sides. This makes sense to lower the risk for sportsbooks.
However, there is a phenomenon known as reverse line movement. It’s simply the opposite of the line movement described above. Basically, an example would be if the majority of the bets were on the Jets +5.5, but the sportsbook decided to move the line to +6.5, further enticing more bets. The above article describes the information cascade that results from this.
They describe how sometimes sportsbooks respect sharps or “pro” betters more than their own supercomputers. If they see that one very respected sharp or multiple sharps are on the side of the less popular side, they may further entice bets on the more popular side as they believe that the sharps know something that they do not. This is an information cascade in that if there’s mixed action between sharps, the sportsbooks may trust their own signals (supercomputers). However, if sharps are one-sided, sportsbooks will ignore their own signal and follow those of the sharps.