Why Pete Rose Didn't Fare Better in His Bets
Posted by Colin Gustafson
Mon, 10 Mar 2008 at 10:17 AM
Insider knowledge doesn't always bring a higher payoff — especially when inside experts try to cheat in a market full of other, well-informed participants.
That's the conclusion of a paper written by a Rutgers University economist, Douglas Coate, and posted yesterday on the Marginal Utility blog
Examining the baseball bets of a disgraced former Cincinnati Reds manager, Pete Rose, Mr. Coate found that Mr. Rose lost $47,200 on bad wagers on the performance of dozens of Major League Baseball teams in April-May 1987. More than $4,000 of those losses were from bad bets on his own team.
So how could this major league insider with nearly three decades of experience in baseball lose so much money to gamblers who had never played the sport professionally, and had no access to any of the league's players or coaches?
Mr. Coate suggests that Mr. Rose, even as a baseball insider, did not possess as significant an informational advantage as he might have thought. In fact, the famed athlete probably failed as a gambler because he was participating in an "informational-efficient market," where other gamblers knew as much as he did about teams' strengths and weaknesses.
Mr. Rose's expertise was not an "advantage when betting on his own team, on other teams in his league that he studied and competed against, or on teams in the other leagues," the author writes.
That, or he was just unlucky: In some cases, Mr. Rose "was a better gambler when he didn't have access to information," the blogger behind Marginal Utility, Kenneth Houghton, writes.
Whatever the case, Mr. Rose's losses in the betting market provide a lesson for participants in the financial markets, Mr. Coates suggests. "The team sports betting markets provide another test of how well markets process information," the economist writes.
"Markets are efficient if the prices of the individual stock at any moment in time reflect all that is known by market participants."