Market ecology and decision behaviour in state-contingent claims markets

This paper explores the influence of market ecology on the tendency for subjective probabilities to underestimate (overestimate) the objective probability of high (low) probability outcomes within a market for state contingent claims (UK horserace betting market). Features of market ecology, including processes, protocols, informational and incentive characteristics and the form of buyer-supplier relationships are identified as potentially influential on the incidence of this distortion. Conditional logit models are employed to demonstrate differential incidence of the distortion across different market forms and types, concluding that market ecology may play a significant role in the incidence of anomalies in markets.