Market Inefficiency and the Learning Curve: The Case of the Sports Lottery Market

28 Pages Posted: 24 Mar 2011

Date Written: March 1, 2011

Abstract

I document market inefficiency in the sports lottery market and examine how participants learn from such inefficiency. Using a novel, parimutuel type sports lottery data in Korea, I show that participants underbet certain outcomes relative to their realized probability. The magnitude of this bias is so great that a naive betting strategy of blindly betting on these outcomes, since the sports lottery's inception in 2008 through 2010, would have resulted in an average after-tax return that was greater than 75% for each game. The size of the abnormal return is even more surprising because these sports lotteries have an unconditional expected return of less than -50% due to a low payout rate. There is some evidence of the learning behavior of participants over time, but not enough to eliminate the above bias.

Keywords: market efficiency, sports betting, learning curve

JEL Classification: G14,D83

Suggested Citation

Hwang, Joon Ho, Market Inefficiency and the Learning Curve: The Case of the Sports Lottery Market (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1787903 or http://dx.doi.org/10.2139/ssrn.1787903

Joon Ho Hwang (Contact Author)

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

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