The Wisdom of Crowds vs. The Smart Money

January 3, 2009
Posted by Jay Livingston

It’s NFL playoff season, and here at the Socioblog, that means it must be time for The Wisdom of Crowds vs. The Smart Money.

The idea behind the “wisdom of crowds” is that the average guess or prediction of a large number of people will be more accurate than that of a few experts (“the smart money”). I looked at these principles two years ago, in a series of posts (here, here, and here).

Today’s game between the Atlanta Falcons and the Arizona Cardinals seems to pit the public against the insiders. The opening line had the Falcons as 3-point favorites, and the public money came in on the Falcons. Normally, the bookmakers would try to balance their books and get an equal amount of money on both sides. To encourage more people to bet on the Cardinals and discourage Falcon bets, they would raise the point spread. Falcon backers might think twice if they had to give up 3 ½ or 4 points rather than 3.

But that’s not what happened. Instead, the line went down. On Friday, Cardinal bettors were getting only 1 ½ or 1 point. Apparently, in addition to the public money coming in mostly on the Falcons, the bookies also got “smart” money on the Cards. The oddsmakers were responding not to the amount of money but to the source. If the smart money was on the Cardinals, they would lower the line to encourage the public to bet on Atlanta.

So today’s game offers a clear choice. If you believe in the wisdom of crowds, you’ll follow the public and bet the Falcons and be happy that you have to give up only a point or so. If you think the smart money is smart, you’ll bet the Cardinals. (But remember, the smart money bet early and got the Cards plus 3 points; you might only get one, or none. Even so, my money’s on the Cards.)

UPDATE Saturday Evening.
The money must have kept coming in on the Cardinals, because by game time they were favored by as much as 2 ½ points. The Cardinals won the game 30-24. The smart money got it right.