Anomalies: Parimutuel Betting Markets: Racetracks and Lotteries

Abstract

Economists have given great attention to stock markets in their efforts to test the concepts of market efficiency and rationality. Yet wagering markets are, in one key respect, better suited for testing market efficiency and rationality. The advantage of wagering markets is that each asset (bet) has a well-defined termination point at which its value becomes certain. The absence of this property is one of the factors that has made it so difficult to test for rationality in the stock market. Since a stock is infinitely lived, its value today depends both on the present value of future cash flows and on the price someone will pay for the security tomorrow. Indeed, one can argue that wagering markets have a better chance of being efficient because the conditions (quick, repeated feedback) are those which usually facilitate learning. However, empirical research has uncovered several interesting anomalies. While there are numerous types of wagering markets, legal and otherwise, this column will concentrate on racetrack betting and lotto-type lottery games.

Market ecology and decision behaviour in state-contingent claims markets

“…More recent studies (e.g. Thaler and Ziemba, 1988;Bird and McCrae, 1994), whilst suggesting some difference in the exact pattern of observed bias, offer dimensionally similar results. In terms of offering a rationale for the bias, a number of studies favour explanations based on aspects of the behaviour of demand-side agents, such as the tendency of bettors to discount potential losses associated with their choice (Henery, 1985) or to discount or deny linkage between losses and the bettor's skill (Gilovich and Douglas, 1986).…”

Do Trade Union Leaders Violate Subjective Expected Utility? Some Insights From Experimental Data

“…3 Firstly, participants in these experiments are usually students. Very few experiments have been run with experts: Einhorn and Hogarth (1985) and Hogarth and Kunreuther (1985) with insurers; Thaler and Ziemba (1988) with racetrack betters; Fox et al (1996) with option traders; Viscusi and Chesson (1999) with business owners and managers. 4 The issue is whether or not students and experts systematically react to uncertainty in different ways, and in particular whether students are more sensitive to uncertainty.…”

Expected utility, skewness, and the baseball betting market

“…Consequently, we believe racetrack betting action is dominated by recreational gamblers who enjoy a`day at the track' and view gambling as a consumption good. This alternative theory was also posited by Thaler and Ziemba (1988) who stated,`(T)he term``locally risk seeking'' may apply to racetrack bettors, but only if the term``locally' ' refers to physical location rather than wealth level! '…”