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Pari-Mutuel Betting Markets: Racetracks and Lotteries Revisited

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  • William T. Ziemba

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia, Canada)

Abstract

This survey discusses the state of the art in research in racetrack and lottery investment markets. Market efficiency and the pricing of various wagers are studied along with new developments since the Thaler & Ziemba (1988) review. The weak form inefficient market pricing approach using stochastic programming optimization models changed racetrack betting from handicapping to a financial market allowing professional syndicates to operate as hedge funds. Topics discussed include arbitrage and risk arbitrage, syndicates, betting exchange rebates, behavioral biases, and fundamental and mispricing information in racetrack and lottery markets. Similar models can be used to successfully trade stock market anomalies. Supplemental Materials are included online.

Suggested Citation

  • William T. Ziemba, 2023. "Pari-Mutuel Betting Markets: Racetracks and Lotteries Revisited," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 641-662, November.
    • Handle: RePEc:anr:refeco:v:15:y:2023:p:641-662
    DOI: 10.1146/annurev-financial-053122-021925
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    Keywords

    pari-mutuel betting markets; efficiency of racetrack betting markets; stochastic programming optimization models; lottery strategies; favorite-longshot bias;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Z23 - Other Special Topics - - Sports Economics - - - Finance

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