The Betfair Prof / Leighton Vaughan Williams / 16 June 2008 /

The Betfair Prof, Leighton Vaughan Williams, tells us why uncertainty leads to over-reaction, meaning value, and why Tiger Woods has been great value both past and present...

At 4.06 pm last Thursday, Tiger Woods teed off alongside Phil Mickelson and Adam Scott at the 7,643-yard Torrey Pines golf course in pursuit of the title of 108th US Open champion. Tiger had generally been trading throughout the day at about [4.5] on Betfair, matched earlier in the week by some bookmakers, on the very course at which he had notched up a record of no fewer than six Buick Invitations out of eleven contested. Why so generous a price? Well, it all comes down to perception about the consequence of an operation on a troublesome knee combined with a nine-week layoff after the Masters.

Common sense might dictate, of course, that Tiger would no more take to the tee while unfit and under-prepared than I would take to Torrey Pines off the championship tees at any time. And Woods had in fact returned from a similar lay-off to win at the San Diego course before - in the 2002 Buick, albeit when the greens were playing a little slower and the rough a little trimmer. It was clearly, therefore, the idea of a renewed 'Battle of Wounded Knee' that did it.

In the circumstances, there was likely to be value in waiting for any sign of weakness in the early holes as the market would be certain to over-react to the context of prevalent uncertainty. And in the event there was not long to wait, as Woods played to the fears of those backing him and delight of those laying him by hooking his opening tee shot into the sand wedge-deep rough and eventually missing a short putt to card six at the par-4.

Was the [8.8] on offer at that point about Woods grasping the title a value price or not, and I don't mean with the benefit of hindsight? Without the 'wounded knee', I would venture that it was clearly very much a value price. Even with the 'wounded knee', and 71 holes still to play, it was still clearly so, and indeed the rest of the round witnessed further apparent over-reactions to the ebb and flow of normal play as Tiger shortened to less than [3.5] at the turn before finishing just a little longer than he'd started after a poor final hole.

The odds movements at the start of the fourth round are most instructive, though, in that Woods carded another painful six on the first-hole par-4, followed by a couple of wayward shots at the second, to lengthen his price of [1.7] at the first tee to a healthy [5.0]. Three rounds had done nothing to reduce the uncertainty, and the odds movements reflected more than a poor start and the fact that two shots had been lost to par.

So what can we learn from all this? Basically, that a context of uncertainty is a very convenient melting pot for the kindling of over-reaction. And that spells value opportunities. Now who said Tiger's knee is playing up again?

Professor Leighton Vaughan Williams is the Director of the Political Forecasting Unit and Betting Research Unit of Nottingham Business School, Nottingham Trent University, and Editor of the Journal of Prediction Markets

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