Open Access Open Access  Restricted Access Subscription or Fee Access

BETTING MARKET: Rank Dependent Expected Utility

Loreto Llorente

Abstract


In Pelota matches, games with two mutually exclusive and exhaustive outcomes, bets on the winner are made through a middleman who receives 16% of the finally paid amount. The classical decision theory of expected utility maximization can not explain this market assuming bettors are identical. Llorente and Aizpurua (2007) explain the existence of bets in the market under Quiggin’s rank dependent expected utility (RDEU) model. They find that bettors have to be optimistic in order to explain the existence of a bet. Analyzing the way odds are fixed in the market Llorente (2006) finds that assuming equal return on bets there are inefficiencies in the market. In this paper we show that, given an assumption that bettors are rank dependent expected utility maximizers, these inefficiencies tend to disappear.


Keywords


Betting, Pelota betting system, sport betting, market efficiency, rank dependent expected utility, individual decision making.

Full Text:

PDF

References


Cain, M., D. Law, and D.A. Peel (1992): “Greyhound racing: further empirical evidence on market efficiency in a wagering market,” Aberystwyth Economic Research Papers, March.

Dowie, J. (1976): “On the efficiency and equity of betting markets,” Economica, 43, 139-150.

Gonzalez, R. and G. Wu (1999). On the Shape of the Probability Weighting Function. Cognitive Psychology 38, 129 – 166.

Henery, R.J. (1985): “On the average probability of losing bets on horses with given starting price odds,” Journal of the Royal Statistical Society, 148 (4), 342-349.

Llorente, L. and J.M. Aizpurua (2007): “A Betting Market: Description and a theoretical explanation of bets in Pelota Matches,” Theory and Decision (forthcoming).

Llorente, L. (2006): “A Profitable Strategy in the Pelota Betting Market,” working paper D.T.0606, Universidad Pública de Navarra (Downloaded at http://www.econ.unavarra.es/investig/papers/index.html).

Quiggin, J. (1982): “A theory of anticipated utility,” Journal of Economic Behavior and Organisation, 3, 323--43.

Quiggin, J. (1993): Generalized Expected Utility Theory: the Rank-Dependent Model. Kluwer Academic Publishers.

Sauer, R.D. (1998): “The Economics of Wagering Markets,” Journal of Economic Literature, XXXVI, 2021-2064.

Smith, M.A., D. Paton and L.Vaughan Williams (2006): “Market Efficiency in Person-toPerson Betting,” Economica, Vol. 73, No. 292, 673-689, November

Thaler, R.H. and W.T. Ziemba (1988): “Parimutual Betting Markets: Racetracks and Lotteries.” Journal of Economic Perspectives 2(2), (1988):161-174.

Vaughan Williams, L. and D. Paton (1997): “Why is There a Favourite-Longshot Bias in British Racetrack Betting Markets?” The Economic Journal, 107, 150-158.




DOI: https://doi.org/10.5750/jgbe.v1i2.515

Refbacks

  • There are currently no refbacks.