The Prediction Market for the Australian Football League

The purpose of this paper is to make a novel contribution to the literature on the prediction market for the Australian Football League, the major sports league in which Australian Rules Football is played. Taking advantage of a novel micro-level data set which includes detailed per-game player statistics, predictions are presented and tested out-of-sample for the simplest kind of bet: fixed odds win betting. It is shown that player-level statistics may be used to yield very modest profits net of transaction costs over a number of seasons, provided some more global variables are added to the model. A comparison of different specifications of the linear probability model (LPM) versus conditional logit (CLOGIT) regressions reveals that the LPM usually outperforms CLOGIT in terms of profitability. It is further shown that adding significant variables to a regression specification which is clearly superior in econometric terms may reduce the efficacy of the prediction and thus profits.

Painful Regret and Elation at the Track

We present an empirical study of loss aversion in the Hong Kong horse betting market. We provide evidence of the presence of loss aversion in a context of complete absence of the favourite-longshot bias. This would suggest that, since loss aversion is a psychological bias, the favourite-longshot bias may not necessarily be caused by psychological issues and may be due, for instance, to informational asymmetry. We investigate different types of bettors and their attitude towards loss aversion. Our data set enables us to distinguish approximately among insiders, unsophisticated outsiders and sophisticated outsiders. The results show clearly that even sophisticated bettors are beset by loss aversion, while even unsophisticated outsiders display no favourite-longshot bias. Thus, our paper provides evidence that loss aversion may be an attitude innate rather than learned, regardless of the level of sophistication in designing economic behaviour or the extent of information asymmetry. Chen et al (2006) show that capuchin monkeys display biases when faced with gambles, including loss aversion, and provide evidence that loss aversion extends beyond humans. The present work supports the idea that loss aversion may be a more universal bias, arising regardless of experience and culture and demonstrates that loss aversion is displayed even by those bettors regarded in the market as “smart money”. Further, we find that more sophisticated and experienced bettors display a higher level of loss aversion. This result is consistent with the findings of Haigh and List (2005), who show that professional traders in financial markets exhibit more loss aversion than do students.

SP Betting as a Self-Enforcing Implicit Cartel

A large share of the UK off-course horse racing betting market involves winning payouts determined at Starting Prices (SP). This implies that gamblers can bet with off-course bookies on any horse before a race at the final pre-race odds as set by on-course bookies for that horse. Given the oligopolistic structure of the off-course gambling market in the UK, a market that is dominated by a small number of large bookmaking firms, we study the phenomenon of SP as a type of self-enforcing implicit collusion. We show that given the uncertainty about a race outcome, and their ability to influence the prices set by on-course bookies, agreeing to lay bets at SP is superior for off-course bookies as compared with offering fixed odds. We thus extend the results of Rotemberg and Saloner (1990) to markets with uncertainty about both demand and outcomes, We test our model by studying the predicted effects of SP betting on the behavior of on-course bookies. Using data drawn from both the UK and Australian on-course betting markets, we show that the differences between these markets are consistent with the predicted effects of SP betting in the UK off-course market and its absence from the Australian market.

Information and Attitudes to Risk at the Track

Abstract There have been many attempts, theoretical and empirical, to explain the persistence of a favorite-longshot bias in various horse betting markets. Most recently, Snowberg and Wolfers (2010) have shown that the data for the US markets support a misperceptions of probability approach in line with prospect theory over a neoclassical approach of the Quandt (1986) type. However, their paper suffers from two basic difficulties which beset much of this literature. First, the theoretical model used fails to allow for the existence of horse betting markets which either display no such bias (or a reverse bias) as in Hong Kong and at least one large Australian market (Busche and Hall, 1988, Schnytzer, Shilony and Thorne, 2003 and Luppi and Schnytzer, 2008). Second, econometric testing and theoretical modeling are facilitated by the highly unrealistic assumption that the betting population is homogeneous with respect to either information or attitude to risk or (usually) both. Our purpose is to show that allowing for heterogeneous betting populations (in terms of both attitude to risk and access to information) permits the explanation for the different biases (or their absence) observed in different markets within a strictly neoclassical framework of rational bettors. We conclude with empirical support for our model.

A General Index of Inherent Risk

We extend the pioneering work of Aumann and Serrano by presenting an index of inherent riskiness of a gamble having the desirable properties of their index, while being applicable to gambles with either positive or negative expectations. As such, our index provides a measure of riskiness which is of use for both risk lovers and risk aversive gamblers, and is defined for all discrete and a large class of continuous gambles. We analyze abstract properties of our index, and present in addition three empirical applications - roulette, horse betting market and US options traded on financial stocks between 2005 and 2007.

Attitudes to Risk and Roulette

We present an empirical framework for determining whether or not customers at the roulette wheel are risk averse or risk loving. Thus, we present a summary of the Aumann-Serrano (2007) risk index as generalized to allow for the presence of risk lovers by Schnytzer and Westreich (2010). We show that, for any gamble, whereas riskiness increases for gambles with positive expected return as the amount placed on a given gamble is increased, the opposite is the case for gambles with negative expected return. Since roulette involves binary gambles, we restrict our attention to such gambles exclusively and derive empirically testable hypotheses. In particular, we show that, all other things being equal, for gambles with a negative expected return, riskiness decreases as the size of the contingent payout increases. On the other hand, riskiness increases if the gamble has a positive expected return. We also prove that, for positive return gambles, riskiness increases, ceteris paribus, in the variance of the gamble while the reverse is true for gambles with negative expected returns. Finally, we apply these results to the specific gambles involved in American roulette and discuss how we might distinguish between casino visitors who are risk averse and those who are risk loving as well as those who may suffer from gambling addictions of one form or another.

False Consciousness in Financial Markets: Or is it in Ivory Towers?

In general, models in finance assume that investors are risk averse. An example of such a recent model is the pioneering work of Aumann and Serrano, which presents an economic index of riskiness of gambles which is independent of wealth and holds (as might be understood from the adjective “economic”) for exclusively risk averse investors. In their paper, they discuss gambles with positive expected returns which will be accepted or rejected by agents which different levels of risk aversion. The question never asked by the authors (and in most of the finance literature) is: Who is offering these attractive gambles? To arrive at an answer, we extend the Aumann-Serrano risk index in such a way that it accommodates gambles with either positive or negative expectations and is thus suitable for both the risk averse and risk lovers. Once we allow for the existence of risk lovers, it may be shown that in financial markets, many gambles with negative expectations are taken either knowingly or unknowingly so that there are always people that act as if they are risk lovers. The paper concludes with a brief discussion of the implications of our result, in particular that gambling is by no means restricted to the casino or the track.

Herding in Imperfect Betting Markets with Inside Traders

Herding is often considered as a phenomenon that drives prices of risky assets away from their equilibrium levels. In this paper we study the on-course UK and Australian horse betting markets. These are simple examples of imperfect markets for state-contingent assets. We provide strong evidence of herding behavior and show that the effects of herding are occasionally sufficient to render the markets inefficient even in the weak sense. Furthermore, the results demonstrate that traders with inside information are not always able to arbitrage away the effects of herding.

Shorting the Bear: A Test of Anecdotal Evidence of Insider Trading in Early Stages of the Sub-Prime Market Crisis

This article uses trading data in the options market for shares in The Bear Sterns Companies (BSC) during the early stages of the US sub-prime crisis as a laboratory to examine the incidence of insider trading. We take the perspective of a regulator making use of hindsight to identify the most propitious periods for insider trades and to identify market activity indicative of insiders. Half the value of options traded were on 19 percent of the days, mostly in contracts in or close-to the money and near to expiry. We find persuasive evidence that insiders could have been active in trading Bear Sterns stock during this period.insider trading, forensic finance, Bear Sterns