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

Author

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  • John Peirson
  • Michael A. Smith

Abstract

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 profit‐maximizing 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.

Suggested Citation

  • John Peirson & Michael A. Smith, 2010. "Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior," Southern Economic Journal, John Wiley & Sons, vol. 76(4), pages 976-992, April.
    • Handle: RePEc:wly:soecon:v:76:y:2010:i:4:p:976-992
    DOI: 10.4284/sej.2010.76.4.976
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    Cited by:

    1. Smith, Michael A. & Vaughan Williams, Leighton, 2010. "Forecasting horse race outcomes: New evidence on odds bias in UK betting markets," International Journal of Forecasting, Elsevier, vol. 26(3), pages 543-550, July.
    2. Robin Maximilian Stetzka & Stefan Winter, 2023. "How rational is gambling?," Journal of Economic Surveys, Wiley Blackwell, vol. 37(4), pages 1432-1488, September.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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