Information Aggregation and Beliefs inExperimental Parimutuel Betting Markets

We study sequential parimutuel betting markets with asymmetrically informed bettors, usingan experimental approach. In one treatment, groups of eight participants play twenty repetitionsof a sequential betting game. The second treatment is identical, except that bettors are observedby other participants who assess the winning probabilities of each potential outcome. In the thirdtreatment, the same individuals make bets and assess the winning probabilities of the outcomes.A favorite-longshot bias is observed in the first and second treatments, but does not exist in thethird treatment. Information aggregation is better in the third than in the other two treatments,and contrarian betting is almost completely eliminated by the belief elicitation procedure. Makingbets improves the accuracy of stated beliefs. We propose a theoretical model, the Adaptive Model,to describe individual behavior and we find that it effectively explains betting decisions, especiallyin the third treatment.