Are Final Market Prices Sufficient for Information Aggregation? Evidence from Last-Minute Dynamics in Parimutuel Betting
This study presents evidence challenging the practice of inferring risk preferences, probability perceptions, and beliefs from parimutuel betting markets, where wagers cannot be made contingent on final odds. Using interim odds from horse racing, we show that expected returns depend not only on final odds but also on the path through which they are reached: horses with final-five-minute odds declines earn higher realized returns than horses with similar final odds. We rationalize this path dependence using a two-period extension of the information-based model à la Ottaviani--Sørensen, in which final-stage odds declines arise from informed bettors' late wagers based on private signals. The model also highlights that final odds--return patterns alone may not distinguish information aggregation from probability distortions.