What prediction markets say about Game 6

Justin Rao and David Rothschild of Microsoft Research looked at what betting markets and our expert panel at ESPN Forecast were telling us ahead of Game 6 and found an interesting disparity:

Are the Heat still favorites? Betting markets and the panel of ESPN Forecast experts disagree.

Is it possible the first five games of the NBA Finals have increased the chances the Heat will win Games 6 and 7? According to the betting markets, the answer is yes.

Betting markets, such as Betfair, are real-money markets in which users wager millions of dollars daily on the outcome of sporting events. And the price of the wagers is a historically strong predictor of the outcome. At the beginning of the Finals, Betfair lines predicted the Heat had a 63 percent chance to win Game 7. Now, even though they are down 3-2 and have lost two games by more than 10 points, the betting markets make the Heat 73 percent favorites to win Game 7, should they get there, and a 73 percent shot in Game 6. Yes, you read that right; the betting markets have increased their confidence in the Heat by a whopping 10 percentage points over the course of the series. These per-game likelihoods mean the market still favors the Heat to win the series (54 percent), despite facing elimination in Game 6.

If this all seems a bit far-fetched, you certainly are not alone. The expert ESPN Forecast panel has lost confidence in the Heat, currently giving the Heat a 54 percent chance to win Game 6, down from 57 percent at the start of the series, and a 57 percent chance to win Game 7, down from 65 percent. The implied chance the ESPN Forecast panel gives the Heat to win the series is only 31 percent, just more than half the betting market’s prediction.

If you have been following the ESPN Forecast predictions, you will have noticed that generally the expert panel and the betting markets have been pretty closely aligned for the entire playoffs. When the Finals started, the panel and the market differed by only two percentage points, the panel giving the Heat a 63 percent chance to win the series and the market predicting 65 percent. Yet now they are 19 percentage points apart on Games 6 and 7.

The question is, whom do you trust, the experts or the market? Are the Heat still the favorites, or are they 2-to-1 underdogs? Unfortunately, they won’t play these last few games 100 times so we could have clean scientific experiment as to who was right and who was wrong. The only reasonable explanation for an increase in the likelihood of a Heat victory is concern over Tony Parker’s health, but he had a strong Game 5 that should have dispelled most concerns. Thus, it is hard for us to justify an increased confidence in the Heat based on the series outcomes so far.

What explains this difference between the market and the experts? We assume that both the markets and ESPN’s panel of experts have access to the same information, but there could be some information the market or panel knows that the other one does not. More likely, the markets weigh users by the amount of money they are willing to wager, while the ESPN panel weighs everyone evenly. ESPN’s smart money is on the Spurs, but there are some people heavily invested, big money, in a Heat victory.