ABSTRACT
Betting markets have been used as a means to
investigate price discovery and market efficiency
because these natural experiments happen numerous
times daily and have a finite time horizon. For
parimutuel betting markets on horse races, betting on
all races on at a track generally opens at least an hour
before the first race and closes for a specific race
when the gates open and the horse race begins. In a
parimutuel market, the track or host acts only as a
market maker, extracting 15-30% of the total pool in
administration fees, called the ‘take’, with the
remainder of the pool redistributed to holders of
winning tickets. Thus, the general public explicitly
determines prices by placing bets. Because this
natural experiment is repeated daily at racetracks
around the world, there is ample opportunity for the
study of these markets (for a good overview of
the literature, see Sauer 1998 and Vaughan Williams
1999). The prices or odds set by the public through
the parimutuel process have been found empirically
to be fairly accurate estimates of the true outcome
probability, while exhibiting a tendency to
overestimate the probability of longshots. This
phenomenon has been dubbed the favourite-longshot
bias and has been found repeatedly across numerous
studies in different betting markets. There are a few
instances of a reverse bias, where favourites are
overbet relative to longshots. Coleman (2004) sum-
marizes previous empirical studies. Those who bet horses typically have a number of
wagering options. These include the standard straight
wagers of win, place and show, and multiple horse
exotic wagers. This article investigates betting market
efficiency in exotic wagers relative to straight wagers.
