The favourite-longshot bias in parimutuel betting: A clarification of the explanation that bettors like to bet longshots

Abstract

One explanation of the favourite-longshot bias in parimutuel betting is that bettors derive utility from betting longshots. The purpose of this paper is to explore the conditions where such an explanation makes sense. We posit a simple two-horse race where there are two groups of bettors: one group always bets the longshot; the other bets on the basis of expected value. The model yields two results. In the absence of transactions costs (track take), there is no favourite-longshot bias. However, if the track take is positive, we would expect to observe the bias. The primary reason is that there is no short-selling mechanism in parimutuel betting markets. Hence, the explanation that bettors like to bet longshots also requires transactions costs and no short-selling.