Public Information and Capital Flows: Evidence from a Betting Market

Abstract

Using a shock to transparency in a parimutuel betting market, we show that capital flows increase in public information even in markets with largely risk-seeking participants. The evidence indicates that capital allocation decisions are partly a function of behavioral mechanisms such as the illusion of control. More broadly, our results suggest transparency can facilitate gambling behavior, a result with implications for the many settings in which decision-makers are not globally risk averse but rather exhibit local risk-seeking behavior. Our findings also inform policy debate on whether and how to use transparency to address speculative flows in financial markets.

Keywords: transparency, public information, capital flows, gambling, illusion of control, market efficiency

JEL Classification: D80, G02, G14, M41, Z23