Pari-mutuel betting markets: racetracks and lotteries revisited

This survey discusses the state of the art in research in racetrack and lottery investment markets. Market efficiency and the pricing of various wagers are studied along with new developments since the Thaler & Ziemba (1988) review. The weak form inefficient market pricing approach using stochastic programming optimization models changed racetrack betting from handicapping to a financial market allowing professional syndicates to operate as hedge funds. Topics discussed include arbitrage and risk arbitrage, syndicates, betting exchange rebates, behavioral biases, and fundamental and mispricing information in racetrack and lottery markets. Similar models can be used to successfully trade stock market anomalies. Supplemental Materials are included online.