Parimutuel contests with strategic risk-sensitive bettors

Parimutuel contests with strategic risk-sensitive bettors

Existing models in the parimutuel betting literature typically explain betting data by either assuming a single, representative bettor with certain risk preferences or by assuming that a number of risk neutral bettors compete strategically within a game theoretic framework. We construct a theoretica...

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Bibliographic Details
Published in:Applied economics Vol. 48; no. 12; pp. 1140 - 1158
Main Authors: Geertsema, Paul, Schumacher, Christoph Rainer
Format: Journal Article
Language:English
Published: London Routledge 08-03-2016
Taylor & Francis Ltd
Subjects:
betting
Gambling
Gambling industry
Game theory
Market structure
New Zealand
Parimutuel
Rates of return
risk aversion
Risk management
Studies
New Zealand
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Summary:Existing models in the parimutuel betting literature typically explain betting data by either assuming a single, representative bettor with certain risk preferences or by assuming that a number of risk neutral bettors compete strategically within a game theoretic framework. We construct a theoretical framework of parimutuel markets in which we model both strategic interaction and individual bettor risk preferences, distinguishing between sophisticated insiders and recreational outsiders. We solve this model analytically for the optimal insider betting amount in a static symmetric Nash equilibrium. A new data set of 126 million individual horse race bets in New Zealand from 2006 to 2014 allows us to calibrate the model. We find that insiders (those betting $100 or more) outperform outsiders by 7.5% in terms of realized returns. The best fit of the model to the data is obtained when insiders are assumed to be risk neutral and to have an information advantage of 0.08 in probability terms. This finding provides empirical support for the common assumption of risk neutrality in strategic interaction models of parimutuel betting.
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ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2015.1093088