Optimal Betting Odds against Insider Traders
AbstractThis paper examines the optimal pricing decision of a bookmaker facing a group of gamblers, some of whom have superior information to the bookmaker. The central result is that the normalized betting odds diverge systematically from the true possibilities of winning. Specifically, it is optimal for the bookmaker to follow a "square root rule" in which the ratio of posted prices is given by the square root of the ratio of winning probabilities. One consequence of this rule is that the betting odds understate the winning chances of the favorites and exaggerate the winning chances of the longshots. This is precisely the bias observed in several empirical investigations of betting markets. Copyright 1991 by Royal Economic Society.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 101 (1991)
Issue (Month): 408 (September)
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- Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2009.
"The Impact of Insider Trading on Forecasting in a Bookmakers' Horse Betting Market,"
2009-11, Department of Economics, Bar-Ilan University.
- Schnytzer, Adi & Lamers, Martien & Makropoulou, Vasiliki, 2010. "The impact of insider trading on forecasting in a bookmakers' horse betting market," International Journal of Forecasting, Elsevier, vol. 26(3), pages 537-542, July.
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- Johnson, J.E.V. & Peel, D. & Peirson, J., 2010. "Systematic and varying biases in parallel state contingent gambling markets," Economics Letters, Elsevier, vol. 109(2), pages 82-84, November.
- Marco Ottaviani & Peter Norman Sørensen, 2009. "Surprised by the Parimutuel Odds?," American Economic Review, American Economic Association, vol. 99(5), pages 2129-34, December.
- Williams, Leighton Vaughan & Paton, David, 1997. "Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?," Economic Journal, Royal Economic Society, vol. 107(440), pages 150-58, January.
- A. Schnytzer & V. Makropoulou & M. Lamers, 2012. "Pricing Decisions and Insider Trading in Horse Betting Markets," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/772, Ghent University, Faculty of Economics and Business Administration.
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