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Optimal Betting and Efficiency in Parimutuel Betting Markets with Information Costs

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  • Terrell, Dek
  • Farmer, Amy
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    Abstract

    Empirical studies of parimutuel games establish several facts not previously explained by theory. For example, market odds fail to provide accurate predictions of outcomes and longshots earn lower expected values than other bets. This paper outlines a model of parimutuel games in which such outcomes arise as a consequence of the takeout of the track. Bettors may purchase true probabilities of events, and equilibrium entry and wagers of these informed bettors lead to patterns observed in previous studies. A case study of the Woodlands Greyhound Park supplies evidence consistent with the model. Copyright 1996 by Royal Economic Society.

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    Bibliographic Info

    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 106 (1996)
    Issue (Month): 437 (July)
    Pages: 846-68

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    Handle: RePEc:ecj:econjl:v:106:y:1996:i:437:p:846-68

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    Cited by:
    1. Russell Sobel & S. Travis Raines, 2003. "An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting," Applied Economics, Taylor & Francis Journals, vol. 35(4), pages 371-385.
    2. Michael A. Smith & David Paton & Leighton Vaughan-Williams, 2004. "Costs, biases and betting markets: new evidence," Working Papers 2004/5, Nottingham Trent University, Nottingham Business School, Economics Division.
    3. Marco Ottaviani & Peter Norman Sorensen, 2010. "Noise, Information, and the Favorite-Longshot Bias in Parimutuel Predictions," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 58-85, February.
    4. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2006. "Parimutuel Betting under Asymmetric Information," Papers on Strategic Interaction 2006-05, Max Planck Institute of Economics, Strategic Interaction Group.
    5. Rachel Croson & James Sundali, 2005. "The Gambler’s Fallacy and the Hot Hand: Empirical Data from Casinos," Journal of Risk and Uncertainty, Springer, vol. 30(3), pages 195-209, May.
    6. Leighton Vaughan Williams & David Paton, 1998. "Why are some favourite-longshot biases positive and others negative?," Applied Economics, Taylor & Francis Journals, vol. 30(11), pages 1505-1510.
    7. Andrey Kudryavtsev & Gil Cohen & Shlomit Hon-Snir, 2013. "“Rational” or “Intuitive”: Are Behavioral Biases Correlated Across Stock Market Investors?," Contemporary Economics, University of Finance and Management in Warsaw, vol. 7(2), June.

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