A central issue in the analysis of markets is the degree to which they are efficient. Although ‘efficiency’ has a variety of meanings in different contexts, a situation is sometimes termed ‘efficient’ if it is not possible to increase the well-being (utility) of any one person without reducing the utility of another. This is usually referred to as Pareto efficiency. An implication of Pareto efficiency is productive efficiency, a situation which exists when it is not possible to increase the quantity produced of any one good without reducing the quantity produced of another.

In the analysis of betting markets – and, indeed, financial markets more generally – however, the examination of efficiency assumes an informational dimension, the existence of which may well be related to that of Pareto or productive efficiency, but the meaning of which is quite distinct. It is this form of efficiency which is the subject of investigation in this volume. This book traces the development of the idea of informationally efficient markets, and identifies the various precise definitions and variations of the concept extant in the literature on financial markets. The theoretical background is clarified, and empirical tests of information efficiency are reviewed and evaluated.

While most studies of information efficiency are conducted within the framework of conventional financial markets, there are a number of special features of betting markets which warrant particular attention and make them of unique relevance to a study of market efficiency.