Market Efficiency in Person‐to‐Person Betting

Abstract

Bookmakers have argued that person‐to‐person internet ‘betting exchanges’ represent unfair competition. In this paper we suggest that, in fact, betting exchanges have brought about significant efficiency gains by lowering transaction costs for consumers. We test this hypothesis using matched data on UK horse racing from betting exchanges and from traditional betting media. In comparison with traditional betting media, we find that betting exchanges exhibit evidence of significantly lower market biases. We also find that an information‐based model explains the well documented favourite–longshot bias more convincingly than traditional explanations based on risk preferences.

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