OPTIMAL PRICE SETTING IN FIXED-ODDS BETTING MARKETS UNDER INFORMATION UNCERTAINTY

This paper develops a model of optimal pricing under information uncertainty for fixed-odds betting markets. The model suggests that bookmakers require a premium for quoting the odds several days before an event. This premium reflects the uncertainty of public information that can be exploited by expert bettors. The model predicts that when bookmakers set optimal prices, expected returns to bettors increase as a monotonic function of winning probabilities. In this manner, an information-based explanation is given for the celebrated favourite-longshot bias in fixed-odds. Using an extensive data-set of football odds from two major European bookmakers, we estimate the probability of informed betting.