Bias Induced by Risk Budgets in Betting Markets
Main Article Content
Abstract
Empirical observations of implied odds from horse race handicapping suggest that, on average, betting markets are informationally efficient. However, longshots are often mispriced. We argue that an implicit risk budget, particularly for races with large field sizes, artificially limits the correct pricing of genuine longshots. This impacts the implied probabilities and therefore prices paid for other runners in a race. Using entropy measures, we demonstrate this mispricing is systemic through betting markets.
Article Details
Issue
Section
Articles