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Home»Betting»Consequences for Betting Markets of Heterogeneous Bettor Motivations
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Consequences for Betting Markets of Heterogeneous Bettor Motivations

BenoItBy BenoItSeptember 4, 2021Updated:November 24, 2021No Comments3 Mins Read
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In closing, let me discuss the consequences of bettors’ varying motivations for betting markets. Perhaps the most important economic question is where the inefficiencies and biases in betting markets arise. Obviously in pari-mutuel markets that do not have a supply side, anomalies arise in the pricing decisions of bettors. But what is the relative contribution of the different bettor populations?

And, of course, in bookmaker markets there is the added complexity of a sophisticated supply side: so where do biases arise here? The most obvious point to make is that many of the biases in betting markets are amenable to multiple explanations. Consider as an example the longshot bias, which motivation in betting markets: speculation, calculus, or fun? 483 is due to relative overpricing of low-probability winners.

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One common explanation is risk, so that some bettors prefer the higher variance of long shots. Alternatively the higher skew of long shots—where wins bring bragging rights—can be attractive even to risk-averse bettors. The bias may be perceptual, where bettors overestimate the probability of low-frequency events because they are more memorable. In any case, bettor populations are segmented such that some bettors pay too much for lowprobability winners and induce the longshot bias.

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Other explanations for the longshot bias that are consistent with heterogeneous bettors is that informed money bets on favorites with long shots attracting less informed money from irrational, less-informed bettors who suspect that public information is incomplete or erroneously discount the attractiveness of favorites. Most analyses of betting market biases look to demand-side causes,3 but an intuitively obvious source of bias in betting markets with a supply side (that is, bookmaker markets, casinos, and lotteries) is the asymmetry between participants on the supply and demand sides.

Usually there are few suppliers of bets, and their prices are sufficiently similar to suggest collusion (an alternative explanation of low, competitive prices under perfect competition is inconsistent with reported profitability of casinos, lotteries, and bookmakers). They are, then, oligopolies, which give opportunities to extract rent through biases in pricing.

Finally

Another advantage is that it is expensive to obtain private information (or manipulate results) for most contests that attract bets, and the higher turnover of bet suppliers makes it easier for them to pay the high fixed costs for monopoly information on contests. Thus, biases and inefficiencies could arise if bet suppliers use monopoly power to distort prices to their advantage and are better able than bettors to form more accurate expectations of contest outcomes. This is a totally rational outcome because the volume of transactions in betting markets makes it very attractive for the most skilled and knowledgeable bettors to operate on the supply side.4

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