Direct tests of the divergence of opinion hypothesis in the market for racetrack betting

The ‘divergence of opinion’ hypothesis suggests predictable pricing effects in markets where assumptions of homogeneous investor expectations and unrestricted short selling do not hold. Direct tests of the hypothesis in traditional financial markets do not exist apparently because of the severity of several requirements, including that measurement of divergent ex‐ante expectations be unambiguously paired with associated ex‐post results. This and remaining conditions are met in direct tests of the hypothesis in a pricing arena where divergence of opinion influences are likely to be present: racetrack betting. Results provide no statistically significant support for the divergence of opinion hypothesis.