Do Gamblers Correctly Price Momentum in NBA Betting Markets?

Abstract

There is little research on whether new information is correctly synthesized in prediction markets. Previous studies have found evidence consistent with, but have not proved, gambler misperceptions on the existence of momentum effects in the NBA. I use novel momentum measures that, unlike prior studies, incorporate the strengths of the opponent and the wins (or losses). With these measures, I test whether gamblers correctly synthesize information on momentum in the NBA. Contrary to previous studies, I find strong evidence for the existence of a momentum effect. Furthermore, gamblers incorporate momentum into their beliefs on the game outcomes. Gamblers, however, significantly overstate the importance of momentum. But, there is little evidence that the extent of this gambler misperception is large enough to generate market inefficiencies, or profit opportunity. Still, the gambler mis-pricing of the information has implications for how well new information is synthesized in other types of prediction markets.