The ‘Sleeping Giant’: A Behavioral Anomaly in Prediction Markets

This paper explores a behavioral phenomenon in sports economics: human tendencies to overbet on more well-known teams—known as “dynasties”—in playoff series, especially when these teams are statistical underdogs. In an emerging world of prediction markets, it is important to not only identify market inefficiencies but also to understand the underlying behavioral factors, as this phenomenon may be present in other liquid markets. Using 12 seasons of NBA betting data (2008–2020) with Elo-based benchmarks, this study found betting markets tend to overprice dynasty underdogs by a mean bias of +10.43 percentage points (p < 0.0001), while non-dynasty underdogs show no statistically significant bias (+0.08pp, p = 0.82), confirming the effect is identity-specific rather than general model error. This mispricing yields a betting strategy with +15.81% gross ROI (62.9% win rate) and persists across the full 12-season sample despite high market liquidity. These findings show that bettors systematically overweight team reputation, creating mispricings that persist despite being exploitable.