May 28, 2018 5:45PM

Are the Caps Really Underdogs? The Economics of Sports Books in the Wake of Murphy v. NCAA

Washington Capitals fans (including this writer) were overjoyed last Thursday night when the team defeated the Tampa Bay Lightning to move onto the National Hockey League’s Stanley Cup Final. But for some Caps fans, that joy soured a bit the next morning when they discovered that Las Vegas oddsmakers have made Washington the underdog in the championship series against the Vegas Golden Knights (VGK).

The VGK have odds of 10/13 to win the series, meaning gamblers would have to bet $13 on the Knights to win $10 (plus the return of their original wager) if the Knights win the series. The Caps are $11/10, meaning a $10 bet would yield $11 if Washington captain Alex Ovechkin hoists Lord Stanley’s Cup. The numbers against the Capitals aren’t lopsided, but they’re a decided nod to the VGK.

Caps fans are a notoriously gloomy, self-afflicted lot given the team’s playoff history, so it’s not surprising they quickly found the cloud surrounding Thursday’s silver lining. Betting odds—basically, futures—are commonly thought to represent the collective intelligence of the marketplace and that wisdom apparently says the Caps’ history of playoff heartbreak will continue.

Or maybe not.

In an article in the forthcoming summer issue of my journal Regulation, economist Ike Brannon discusses bookmaking (the art of setting betting lines)—both legal and illegal—in light of the recent Supreme Court decision striking down a federal law prohibiting most states from legalizing sports gambling. (The article will be available at in a few weeks.) Borrowing from the work of Wake Forest University economist Koleman Strumpf, who has studied illegal sports gambling extensively, Brannon points out some features of bookmaking that should encourage Caps fans—and should interest anyone who is intrigued by this market-driven process.

One thing that observers should immediately notice is that if the Caps and VGK odds are converted to a standard probability scale between 0 and 1, the sum of those probabilities is greater than 1: 0.65 + 0.45 = 1.10. Part of that amount over 1 is the “vigorish” (also known as the “juice”), the cut that bookies take for providing their services. Stumpf’s research indicates the vig from illegal sports books is about 10% of the bet, while legal books’ is much lower—sometimes as little as 2%.

If we factor in a vig of 5%, the odds-equivalent that the VGK will win the Cup decreases to 0.62. Of course, the Caps’ odd-equivalent probability also decreases to 0.43. So, Caps fans still seem to be right to be gloomy.

But if we add up these two new probabilities, we still get a sum greater than 1. This is where things get very interesting—and possibly in a very important way for legal sports gambling. And, I might add, a bit more encouraging for Caps fans.

Brannon, again borrowing from Strumpf, explains that backroom bookies have long practiced “price discrimination” for hometown teams. That is, they tweak their odds to take advantage of passionate local sports fans who will bet on “their” team at odds or point spreads that are worse than a fair estimate of the probability that the team will win. I suspect bookies sometimes do the opposite for opponents of the hometown team, in an effort to attract some opposing-team money even at generous odds. As a result, bookies often have significantly different odds for a local game than Las Vegas does. These odds aren’t the pure wisdom of the local market, but also its passion for the hometown team.

Up till now, legal Las Vegas bookmakers have had no opportunity to borrow this practice from their black market brethren—at least, not at the major-league level because no major league teams operated in the city. Legal gambling in Las Vegas has been dominated by out-of-towners. But this is the inaugural season of the VGK and local residents have embraced the team—and are betting on them to win. So the VGK line likely reflects in part the Las Vegas bookmakers price-discriminating against their friends and neighbors.

There’s a bit of early evidence that this is happening. Offshore oddsmakers don’t have this opportunity to price discriminate on North American sports (unless they adjust their odds in light of location indicators of their online customers), so the offshore odds may be more “accurate” than the Vegas odds. I haven’t found a good online summary of offshore odds for the Caps-VGK series, but the documented odds for Game 1 are closer on the offshore books than the Las Vegas books (though they still favor the VGK, who will be the home team in that game).

This could have some interesting ramifications in the next few years. For instance, the National Football League’s Raiders franchise has announced that it plans to move from Oakland to Las Vegas as early as 2019. When that happens, Las Vegas will have to weigh the pros and cons of price-discriminating on games in one of the most gambled-upon sports.

The more important ramification involves the the expected legalization of sports gambling in locations across the United States. Will those locations likewise price-discriminate against their local teams? If so, it could create some profitable arbitrage opportunities.

Shrewd sports gamblers might try a strategy where they bet against a team in that team’s home market, AND bet against the opposing team in its home market. That way, the gamblers would be on the “good” side of the price-discriminated odds regardless of a game’s outcome, thus reducing their losses and increasing their winnings. In theory, this should be a money-making strategy.

Gamblers don’t use this strategy currently because the sizeable vig from black market bookies syphons off the arbitrage profits. But the much lower vig offered by legal sports books would seemingly make this strategy a winner. Of course, bookies—legal and illegal—are careful to avoid giving customers opportunities to regularly “beat the house”—so it will be interesting to see what they’ll do to block this strategy.

Returning to Capitals fans, here’s the good news: if we interpret the Las Vegas odds in light of Brannon and Strumpf, then it would seem the market actually has a much better appraisal of Washington’s chances of raising the Cup sometime in the next few week. So, Washington sports fans, buck up, and Let’s Go Caps!