Weather Plays Major Role In Outcomes In Sport And Financial Arenas

June 23, 2004

GAINESVILLE, Fla. — It may be no surprise to avid football fans that teams coming from warm climates have a tough time winning in the cold, but new research shows investors might want borrow a page from the same playbook.

A University of Florida study has found not only that the magnitude of the home field climate advantage in football is much greater than previously thought, but that weather may also play a significant role in how people behave in financial arenas as well.

By looking at Las Vegas football betting, a legal billion-dollar-a-year industry, a UF researcher found not only that bettors are not fully realizing the advantage home teams have during cold weather, but has determined market investors often make mistakes when evaluating the worth of stocks because they fail to take into account outside factors, such as weather.

“This study finds that the home team has an unexpectedly large advantage when the away team is accustomed to playing in very different conditions,” said Richard Borghesi, a UF finance student who conducted the study for his doctoral dissertation. What’s more, because sports betting markets are so large, comparisons likely can be drawn to how people might behave with respect to financial markets, he said.

Using football betting markets as a model for equities markets, Borghesi wanted to determine whether investors were making rational decisions when valuing stocks.

The amount of money placed on football bets alone is enormous. In Nevada, where such gaming is legal, bets on football games totaled nearly $1 billion last year, according to the University of Nevada in Reno Institute for the Study of Gambling and Commercial Gambling. At least 10 times that amount is likely placed in illegal markets created by local bookies, Borghesi estimated.

For his study, Borghesi used point-spread data from more than 4,000 National Football League games over the last 20 years and compared them to the outcomes of the games and to the weather in which the games were played. He found that a home team that typically practices in cold weather is very likely to win a game against a visiting team from a warm climate, or it will at least beat the “spread,” the predicted point difference of the winning and losing scores and the amount that a bettor tries to match to win.

Specifically, the study measured the difference between the average temperature in which an away team plays and the game-day temperature. It found that when the game-day temperature is much lower than the visiting team is accustomed to, the home team has an advantage that is between one and four points larger than expected, and those who bet on the home team consistently win more than half the time.

He found that because gamblers undervalue the advantage gained by home teams playing in open-air stadiums on particularly cold game days, betting on home underdogs is consistently profitable, thereby fueling the so-called “home underdog effect.” If football “investors” were in fact rational, he said, they would be able to accurately calculate how much home teams benefit from bad weather conditions.

“If they knew the magnitude of the game-day temperature’s impact, then the home underdog effect would not exist. This provides evidence that people can be making mistakes when they evaluate the different things that go into the value of stocks,” Borghesi said.

Based on some estimates, sports betting is a $200 billion-a-year enterprise, said Andy Naranjo, a UF professor of finance and Borghesi’s dissertation adviser.

“Therefore taking a bigger-picture perspective, findings from these sports-betting markets reveal information about human psychology and the operation of financial markets more generally. I would imagine that in the heat of the summer or the cold of the winter, people can relate to the influence of weather on markets. There has also been other financial-market research that demonstrates psychological relationships between weather and performance,” Naranjo said.