Probability and Utility Estimates for Racetrack Bettors

Ali, Mukhtar M.

doi:10.1142/9789812819192_0011

Cited by 17 publications

(24 citation statements)

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“…This Proposition is established by Ali (1977) (4) and Manski (2006) (1). This Proposition corresponds to Theorem 2 of Ali (1977).…”

Section: Modelmentioning

confidence: 80%

“…This Proposition is established by Ali (1977) (4) and Manski (2006) (1). This Proposition corresponds to Theorem 2 of Ali (1977). It shows that in a oneperiod model, the equilibrium price in a prediction market may not represent the underlying median belief of the traders.…”

Section: Modelmentioning

confidence: 80%

“…First, in the case of risk-neutral traders with limited budgets, a longshot bias, when the prices are biased towards 1/2 (see, for instance, Srensen, 2009, 2010a) can arise even if their beliefs are well calibrated. The reason for this is that the market clearing condition typically requires that the price be located not at the median of the distribution of tradersÕ beliefs but at a percentile closer to 1/2 than the median (Ali, 1977;Manski, 2006). Extending this framework, Ottaviani and Srensen (2010b) examine a fully revealing rational expectations equilibrium, in which traders make correct inferences from prices, given common knowledge of the information structure and prior beliefs.…”

Section: Calibration Of Prediction Market Pricesmentioning

confidence: 99%

“…To model the trader's choice, we introduce a time dimension into the framework proposed by Manski (2006) which is the prediction market equivalent of the framework proposed by Ali (1977) for racetrack betting. In this framework, a risk-neutral trader with budget y has the opportunity to purchase some quantity of a single contract.…”

Section: Modelmentioning

confidence: 99%

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Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?

Page

Clemen

2012

The Economic Journal

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This article presents new theoretical and empirical evidence on the forecasting ability of prediction markets. We develop a model that predicts that the time until expiration of a prediction market should negatively affect the accuracy of prices as a forecasting tool in the direction of a ‘favourite/longshot bias’. That is, high‐likelihood events are underpriced, and low‐likelihood events are over‐priced. We confirm this result using a large data set of prediction market transaction prices. Prediction markets are reasonably well calibrated when time to expiration is relatively short, but prices are significantly biased for events farther in the future. When time value of money is considered, the miscalibration can be exploited to earn excess returns only when the trader has a relatively low discount rate.

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“…This Proposition is established by Ali (1977) (4) and Manski (2006) (1). This Proposition corresponds to Theorem 2 of Ali (1977).…”

Section: Modelmentioning

confidence: 80%

Section: Modelmentioning

confidence: 80%

Section: Calibration Of Prediction Market Pricesmentioning

confidence: 99%

Section: Modelmentioning

confidence: 99%

See 2 more Smart Citations

Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?

Page

Clemen

2012

The Economic Journal

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“…The overwhelming evidence to emerge from favourite/longshot studies, dispersed in time and across the world, is that the odds of favourites (low odds)/longshots (high odds) consistently under-/over-estimate their true chances 2 (e.g. USA: Ali 1977;Asch et al 1982;McGlothlin 1956;Snyder 1978;Thaler and Ziemba 1988;Ziemba and Hausch 1986; Australia: Bird and McCrae 1994;Tuckwell 1983;New Zealand: Gander et al 2001;UK: Bruce and Johnson 2000;Dowie 1976;Vaughan Williams and Paton 1997). Despite this widespread pricing discrepancy, the vast majority of evidence suggests that this is not sufficiently large to enable profitable trading strategies to be constructed (e.g.…”

Section: Weak-form Efficiency In Horserace Betting Marketsmentioning

confidence: 99%

Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies

Sung

Johnson

2009

Economica

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This paper examines the degree to which current prices discount historical prices in a market for state contingent claims. Conditional logit analysis is employed to predict winning probabilities, based on market prices in a betting market. These are used, together with various wagering strategies to yield substantial abnormal returns. Consequently, in contrast to the existing literature, the results suggest that the market is not weak form efficient. The disparity with previous efficiency studies highlights the importance of considering market ecology and of adopting an appropriate modelling procedure and investment strategy to fully exploit information contained in market prices. Copyright (c) The London School of Economics and Political Science 2008.

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Losers and prospectors in the short‐term options market

Chatrath

Christie–David

Miao

et al. 2019

Journal of Futures Markets

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Intraday data for weekly options are investigated for behavioral biases implied in prospect theory (PT) and cumulative prospect theory (CPT). The results generally support both theories, with losers (winners) observed to be relatively risk‐seeking (averse). On aggregate, losers (winners) overprice (underprice) their contracts and overweight (underweight) the probability of winning. Additionally, the volatility smirk observed in equity options is dampened by PT/CPT biases. The price distortions are time sensitive, especially for losing traders. Losers hold out by transacting later in the day and closer to expiration than their baseline counterparts. This betting‐time effect is absent among winners.

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Probability and Utility Estimates for Racetrack Bettors

Cited by 17 publications

References 0 publications

Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?

Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?

Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies

Losers and prospectors in the short‐term options market

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