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Efficiency and the Disposition Effect in NFL Prediction Markets

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  • Samuel M. Hartzmark

    (University of Southern California Marshall School of Business, 3670 Trousdale Parkway, Los Angeles, CA, 90089, USA)

  • David H. Solomon

    (University of Southern California Marshall School of Business, 3670 Trousdale Parkway, Los Angeles, CA, 90089, USA)

Abstract

Examining NFL betting contracts at Tradesports.com, we find mispricing consistent with the disposition effect, where investors are more likely to close out profitable positions than losing positions. Prices are too low when teams are ahead and too high when teams are behind. Returns following news events exhibit short-term reversals and longer-term momentum. These results do not appear driven by liquidity or non-financial reasons for trade. Finding the disposition effect in a negative expected return gambling market questions standard explanations for the effect (belief in mean reversion, prospect theory). It is consistent with cognitive dissonance, and models with time-inconsistent behavior.

Suggested Citation

  • Samuel M. Hartzmark & David H. Solomon, 2012. "Efficiency and the Disposition Effect in NFL Prediction Markets," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 1-42.
    • Handle: RePEc:wsi:qjfxxx:v:02:y:2012:i:03:n:s2010139212500139
    DOI: 10.1142/S2010139212500139
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    References listed on IDEAS

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    1. Zuchel, Heiko, 2001. "What Drives the Disposition Effect?," Sonderforschungsbereich 504 Publications 01-39, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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    6. Zuchel, Heiko, 2001. "What drives the disposition effect?," Papers 01-39, Sonderforschungsbreich 504.
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    Cited by:

    1. Bachmann, Kremena, 2024. "Do you have a choice?: Implications for belief updating and the disposition effect," Journal of Economic Psychology, Elsevier, vol. 102(C).
    2. Tobias Kranz & Florian Teschner & Christof Weinhardt, 2015. "Beware of Performance Indicators," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 57(6), pages 349-361, December.
    3. Bernard, Sabine & Loos, Benjamin & Weber, Martin, 2021. "The disposition effect in boom and bust markets," SAFE Working Paper Series 305, Leibniz Institute for Financial Research SAFE.
    4. Raphael Flepp & Stephan Nüesch & Egon Franck, 2013. "Liquidity, Market Efficiency and the Influence of Noise Traders: Quasi-Experimental Evidence from the Betting Industry," Working Papers 341, University of Zurich, Department of Business Administration (IBW).
    5. Steven Haryanto & Athor Subroto & Maria Ulpah, 2020. "Disposition effect and herding behavior in the cryptocurrency market," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(1), pages 115-132, March.
    6. Samuel M. Hartzmark & David H. Solomon, 2019. "The Dividend Disconnect," Journal of Finance, American Finance Association, vol. 74(5), pages 2153-2199, October.
    7. Li, Jianbiao & Niu, Xiaofei & Li, Dahui & Cao, Qian, 2018. "Using Non-Invasive Brain Stimulation to Test the Role of Self-Control in Investor Behavior," EconStor Preprints 177890, ZBW - Leibniz Information Centre for Economics.
    8. Alasdair Brown & Fuyu Yang, 2017. "Salience and the Disposition Effect: Evidence from the Introduction of “Cash‐Outs” in Betting Markets," Southern Economic Journal, John Wiley & Sons, vol. 83(4), pages 1052-1073, April.
    9. Marco Pleßner, 2017. "The disposition effect: a survey," Management Review Quarterly, Springer, vol. 67(1), pages 1-30, February.
    10. Weber, Martin & Mueller-Dethard, Jan, 2020. "The Portfolio Composition Effect," CEPR Discussion Papers 15012, C.E.P.R. Discussion Papers.
    11. Chen, Daniel L. & Loecher, Markus, 2016. "Mood and the Malleability of Moral Reasoning: The Impact of Irrelevant Factors on Judicial Decisions," IAST Working Papers 16-49, Institute for Advanced Study in Toulouse (IAST), revised Sep 2019.
    12. Chen, Daniel L., 2016. "Mood and the Malleability of Moral Reasoning," TSE Working Papers 16-707, Toulouse School of Economics (TSE), revised Feb 2017.

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