Rationality and Risk Intelligence in Binary Betting

Abstract

We analyze 1.6 million binary bets on financial markets totaling $600 million in stakes, placed by 21,000 bettors at a large Internet betting site. The data set is unusually large and complete, plus has one additional important advantage: we can obtain objective independent estimates of the ex ante probability of winning each bet, using data from financial markets. This allows us to distinguish bettor profit due to superior prediction of financial events from bettor profit due to exploiting ex ante favorable odds situations. We focus on the degree or type of skill possessed by bettors (if any), and the amount of rationality and risk intelligence demonstrated in exploiting that skill.

Keywords: Betting, Financial betting, risk intelligence, bet sizing, betting rationality, binary bets

JEL Classification: D84