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Symposium Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior

  • John Peirson

    ()

    (Department of Economics, Keynes College, University of Kent, Canterbury, Kent CT2 7NP, UK.)

  • Michael A. Smith

    ()

    (Leeds Business School, Bronte Building, Leeds Metropolitan University, Leeds LS1 3HE, UK.)

We present a new model analyzing the effect of uncertainty faced by bookmakers. It is shown that bettors with inside information or expert analysis decrease the odds set by profitmaximizing bookmakers. Data on previously unraced 2-year-old horses and those that have raced previously are used to examine the impact of the greater possibility of insider information on odds bias in relation to unraced horses. The probability of an unraced 2-year-old winning is found to be on average 16% higher than that of a raced 2-year-old horse with the same odds. This effect decreases as the probability of winning increases. The latter effect indicates a possible contribution to the favorite-longshot bias, and the former shows the importance of insider information in the setting of market odds. The regulation of the use of insider information is discussed in light of the similar impact of insider information and expert analysis on bookmaker odds.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 76 (2010)
Issue (Month): 4 (April)
Pages: 976-992

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Handle: RePEc:sej:ancoec:v:76:4:y:2010:p:976-992
Contact details of provider: Web page: http://www.southerneconomic.org/

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  1. Ron Bird & Michael McCrae, 1987. "Tests of the Efficiency of Racetrack Betting Using Bookmaker Odds," Management Science, INFORMS, vol. 33(12), pages 1552-1562, December.
  2. Raymond D. Sauer, 1998. "The Economics of Wagering Markets," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2021-2064, December.
  3. Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-15, August.
  4. Law, David & Peel, David A, 2002. "Insider Trading, Herding Behaviour and Market Plungers in the British Horse-Race Betting Market," Economica, London School of Economics and Political Science, vol. 69(274), pages 327-38, May.
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  6. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June.
  7. Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.
  8. Paton, David & Vaughan Williams, Leighton & Fraser, Stuart, 1999. "Regulating Insider Trading in Betting Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 51(3), pages 237-41, July.
  9. Schnytzer, Adi & Shilony, Yuval, 1995. "Inside Information in a Betting Market," Economic Journal, Royal Economic Society, vol. 105(431), pages 963-71, July.
  10. Hurley, William & McDonough, Lawrence, 1995. "A Note on the Hayek Hypothesis and the Favorite-Longshot Bias in Parimutuel Betting," American Economic Review, American Economic Association, vol. 85(4), pages 949-55, September.
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