Optimal Determination of Bookmakers' Betting Odds: Theory and Tests

This paper develops a theoretical model of how bookmakers’ odds are determined, given varying levels of inside information on the part of punters. Bookmakers’ attitudes towards risk and the degree of competition between them will influence bookmaker behaviour. Using a data set of 1696 races in Ireland in 1993, we find that bookmakers are extremely risk-averse, and estimate that operating costs and monopoly rents combined account for up to 4% of turnover and that between 3.1% and 3.7% of betting is by punters with inside information.