How Does Inside Information Affect Sports Betting Odds?

ABSTRACT We describe how insiders with superior information about potential outcomes of sporting events affect odds set by bookmakers, using a generalized version of a model due to Hyung‐Song Shin. The model has been cited as an explanation for the pattern of favorite‐longshot bias observed in fixed‐odds betting markets. We show disagreement among those bettors without inside information causes favorite‐longshot bias. The presence of insiders reduces odds but does not necessarily exacerbate favorite‐longshot bias. For realistically calibrated beliefs, the fraction of insiders has a minimal effect on the ratio of favorite to longshot odds, and betting markets collapse if it rises above low levels.