Market Efficiency in Person-to-Person Betting

Established gambling operators have argued that person-to-person wagering on Internet ‘betting exchanges’ represents 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 contrast to traditional betting media, we find that betting exchanges exhibit both weak and strong form market efficiency. Further, we find evidence that an information based model explains the well documented favourite-longshot bias more convincingly than traditional explanations based on risk preferences.