The generalized handicap wager market for football bets : theory and evidence

Abstract

Gambling is a near universal past time that takes on many varied and interesting market forms. One such interesting market is the handicap wager market for football bets, an organized market in which bets are placed on game pointspreads through bookmakers, for which moreover there is some public record. This study is a descriptive, theoretical, and empirical analysis of this market. Previous studies have analyzed the handicap wager market for football bets empirically and theoretically, however, it is the thesis of this dissertation that these studies were based on an incorrect model of bookmaking operations. The dissertation begins with a review of the expected utility maximization model and risk aversion measurement literature. Wager market studies other than those on handicap football betting are reviewed to provide a background for the relation between the market structure and the expected utility-risk aversion theorems. The empirical and theoretical results of the two previous studies of the handicap wager market for football bets are then shown to depend critically on the assumed market structure. Based on an extensive literature search, a description of the actual operating characteristics of handicap and football bookmaking is presented to show how the previous studies were in error. A generalized handicap wager market is then developed from this correct market description. A theoretical model of individual maximizing behavior in the generalized handicap wager market is developed and analyzed. From this model, the comparative static properties of the optimal amount to bet were derived. The variables that affect the amount bet are the market handicap, subjective loss odds, transaction cost, and the bettor's wealth..