Any fan watching sport on commercial television cannot fail to notice the endless betting adverts. The latest feature promoted to punters by many bookmakers and betting exchanges is the `Cash-Out’ facility. This allows bettors to unwind their earlier bets as matches progress. Therefore, rather than wait until the end of the match to see if their favoured team wins, they can close out their position at a profit (or loss, depending on the state of play) while the match is still running. Prior to Cash-Out it was possible to close out winning and losing positions on Betfair, before matches ended, but the bettor would have had to manually calculate the required stake, and place a new offsetting bet; Cash-Out reduces this process to the press of a button. The actor Ray Winstone, in one advert, explains that `sometimes you’ve just got to take the money and run’.
In a recent working paper presented in the School last month, I, and my co-author Fuyu Yang, analyse the effect of the introduction of Betfair’s Cash-Out on the behaviour of bettors. A well-known regularity in behavioural finance is the disposition effect. This describes the tendency of investors to sell stocks that have risen in value since purchase, and hold those that have fallen in value. This is something of a puzzle, as stocks tend to exhibit momentum. Well-performing stocks continue to perform well, while poorly-performing stocks continue to lag behind. Investors exhibiting the disposition effect miss out on this momentum.
We find a similar disposition effect in betting markets. Punters are much more likely to unwind (sell) their earlier bets – rather than hold them until the end of the game – if they are trading at a gain rather than a loss. Furthermore, the introduction of Cash-Out on Betfair in February 2011 amplified this disposition amongst bettors, as well-performing bets were sold with even greater frequency. We argue that by making it easier to close out bets, and increasing the salience of a bettor’s paper profits and losses, betting companies have exacerbated the disposition effect. There is no sign, on Betfair at least, that these bets are unwound at disadvantageous prices, and therefore there is no indication that bettors exhibiting the disposition effect are particularly exploited by betting companies (or other bettors). Nevertheless, our results suggest that small adjustments to betting (and financial) market design can have significant effects on behaviour.
The latest version of the paper, titled `Salience and the Disposition Effect: Evidence from the Introduction of `Cash-Outs’ in Betting Markets, is available on SSRN.