Anomalies: Parimutuel Betting Markets: Racetracks and Lotteries

TLDR

Wagering markets, unlike stock markets, have a clear termination point for each bet, making them more suitable for testing market efficiency and rationality. This column focuses on racetrack betting and lotto‑type lottery games.

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.