Favorite-longshot Bias Research Articles

Sequential Parimutuel Betting in the Laboratory

This paper investigates parimutuel betting in the laboratory. Our experimental design relies on a simple sequential betting game where equilibrium strategies are characterized according to objective probabilities, the number of bettors, and publicly observable odds. The empirically well-documented phenomenon referred to as the “favorite-longshot bias” is observed in two of our three treatments. We offer a theoretical explanation of the subjects' behavior which relies on rank-dependent expected utility and pessimistic expectations about future bets.

A better probability model for the racetrack using Beyer speed numbers

The dominant model in research related to the racetrack is that a horse's probability of winning a race is equal to the fraction of the win pool bet on that horse when adjusted for a favorite long-shot bias. A new model is developed using Beyer speed numbers to estimate the probability of a horse winning a race. An SPRT like test is developed to determine which of these two models is better. Although developed for the racetrack, this SPRT like test can be utilized whenever there are two models for assigning probabilities and the better model needs to be selected.

The Favourite‐Longshot Bias, Bookmaker Margins and Insider Trading in a Variety of Betting Markets

This paper verifies the existence of the favourite‐longshot bias in a variety of sports betting markets where odds are set by bookmakers, but the precise pattern of the bias is not identical. Evidence is found to support a central prediction of the Shin (1993) model, which asserts that bookmakers are impelled to create a bias in their odds because of the presence of insider traders: that margins increase with the number of competitors.

Broken odds and the favourite-longshot bias in parimutuel betting: a direct test

This research examines empirically the effect using broken odds - the rounded off odds reported by horse track operators - on statistical tests of market efficiency in parimutuel gambling. It finds that using rounded-off odds to test for market efficiency, instead of using the exact values, introduces a downward bias in the test statistics for favourite horses. Previous studies, because they relied on the rounded-off odds data, may have overstated the extent of the favourite-longshot bias in parimutuel wagering markets.

An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting

Market efficiency dictates it equally profitable to bet on any racing participant, including the favourite or longshot. However, a well-documented anomaly is that racetrack bettors tend to overbet longshots and underbet favourites. This study presents and tests two theoretical explanations for this favourite-longshot bias. The unparalleled richness of the data allows the exploration of how the bias changes with several key variables. This study finds the most popular current explanation for the bias, the risk preference model, cannot explain the data as well as an information-based model, in which the bias depends on bet complexity and the information possessed by bettors.

The Reverse Favourite–longshot Bias and Market Efficiency in Major League Baseball: An Update

Racetrack and sports betting markets have been researched extensively with respect to the question of market efficiency. In contrast to the consistently observed favourite–longshot bias found in racetrack betting markets, it has been shown that gamblers in the market for Major League Baseball games reveal the opposite behaviour. This paper updates the previous study with ten years of additional data for the 1990–99 seasons. The strength of the reverse favourite–longshot bias is virtually identical to the original paper. The result suggests that, contrary to most reported inefficiencies in gambling markets, this bias appears to be permanent.

Racetrack betting and consensus of subjective probabilities

In this paper we consider the dynamic process of race track betting. We show that there is a close connection between the dynamic race track betting process and the pari-mutuel method for constructing consensus of subjective probabilities considered in Eisenberg and Gale. This enables us to show that there exists a unique equilibrium point for the betting process. We further show that the dynamic betting process converges to this equilibrium point almost surely. Therefore the sequential race track betting gives a natural approach to inducing the consensus probabilities in Eisenberg and Gale. These consensus probabilities are different from the average of the subjective probabilities which is used in the conventional way of combining individually held opinions into a collective group statement. We compare these probabilities and this leads to a potential explanation of the favorite-longshot bias consistently observed in the studies of race track betting.

The representative bettor, bet size, and prospect theory

Models of representative bettors have ignored the decision on the size of bet that a gambler takes. By modelling bet size, the favourite-longshot bias observed in many pari-mutuel betting markets is shown to be consistent with both: (i) a representative bettor taking decisions, according to prospect theory, based on standard shaped value and weighting functions, and (ii) the bettor simply being risk loving for gains and risk averse for losses.

The Favorite-Longshot Bias in Sequential Parimutuel Betting with Non-Expected Utility Players

This paper analyzes a model of sequential parimutuel betting described as a two-horse race with a finite number of noise bettors and a finite number of strategic and symmetrically informed bettors. For generic objective probabilities that the favorite wins the race, a unique subgame perfect equilibrium is characterized. Additionally, two explanations for the favorite–longshot bias—according to which favorites win more often than the market's estimate of their winning chances imply—are offered. It is shown that this robust anomalous empirical regularity might be due to the presence of transaction costs and/or to strategic bettors' subjective attitude to probabilities.

Some analysis of the properties of the Harville place formulae when allowance is made for the favourite-long shot bias employing Shin Win probabilities

Some analysis of the properties of the Harville place formulae when allowance is made for the favourite-long shot bias employing Shin Win probabilities

Re-examining the betting market on Major League Baseball games: is there a reverse favourite-longshot bias?

A recent study of the fixed-odds betting market on baseball games, while finding that the betting market is generally efficient, also found evidence of an underbetting on underdog teams. This article examines the evidence for this new anomaly. It corrects Woodland and Woodland's estimates of the commission, subjective win probabilities and test statistics. The efficiency null hypothesis cannot be rejected for all of their tests when revised test statistics are calculated for their sample period (however, like them, it was found that slight underdogs are underbet). It is also shown that their bias is not simply a bias involving favourites and underdogs. Whether underdogs are playing at home or away also seems to matter in their sample period. As well a positive relationship between returns and subjective probabilities was found for underdogs and favourites, a relationship suggestive of a favourite-longshot bias rather than its reverse. It is concluded that there is insufficient evidence to claim that this bias is a ‘true market inefficiency’.

Is one price enough to value a state-contingent asset correctly? Evidence from a gambling market

The answer to this question, based on a study of 1000 greyhound races, is ‘no’. Although the efficient markets hypothesis asserts that speculative market prices optimally encapsulate all relevant information, it is found that ‘Shin probabilities’ (based on Shin, 1993), in which a dog's winning probability is a complicated function of the winning probabilities of all contenders in the race, correct the favouritelongshot bias, and in doing so dominate the predictive abilities of individual market prices, and of linear and non-linear functions of them. Since there is an equivalent bias in at least some financial markets, the finding may have wider application.

Searching for the favourite-longshot bias down under: an examination of the New Zealand pari-mutuel betting market

This paper tests for the presence of the favourite-longshot bias in a new setting. This bias #150 the tendency for bettors to underbet favourites and overbet longshots #150 has been found in most studies of pari-mutuel and bookmaking betting markets in the USA, the UK and Australia. However, there is growing evidence that in at least some pari-mutuel betting markets there is no favourite-longshot bias. This paper examines the previously unexplored New Zealand pari-mutuel betting market on horse races for evidence of this bias. Utilizing a large sample of recent New Zealand thoroughbred horse races, it is found that while early, off-track bettors price this bias into odds, late (on-and off-track) bettors eliminate much of the bias by the close of betting. That is, the results reinforce the view that not all pari-mutuel betting markets are characterized by a favourite-longshot bias at the close of betting. Evidence is also found that late bettors in this market are smart bettors.

Investigating the roots of the favourite–longshot bias: an analysis of decision making by supply‐ and demand‐side agents in parallel betting markets

Investigating the roots of the favourite–longshot bias: an analysis of decision making by supply‐ and demand‐side agents in parallel betting markets

Product bundling and a rule of thumb versus the Harville formulae: can each way bets with UK bookmakers generate abnormal returns

Bookmakers practise a type of product bundling. To bet a horse for a place a punter has to bet an equal amount for a win. The returns to the place component of the bet are determined by a rule of thumb. This paper examines whether the product bundling negates a betting strategy that endeavours to exploit any inefficiency in pricing of the place component of each way bets based on the Harville formulae. In order to implement the Harville formulae Shin probabilities are employed, which correct for the favourite longshot bias in starting price odds, as measures of win probabilities. The analysis suggests that small positive expected returns to each way bets appear to exist.

Investigating the roots of the favourite-longshot bias: an analysis of decision making by supply- and demand-side agents in parallel betting markets

This paper offers new insights into the behavioural origins of the favourite-longshot bias - an established feature of betting markets, whereby longshots win less often than the subjective probabilities imply and favourites more often. A number of alternative explanations has been offered for this phenomenon but the main debate focuses on whether it is caused by the behaviour of those supplying betting markets (bookmakers) or of the demand-side agents in these markets (bettors) . This study analyses a new data source which offers detailed information for a large sample of recent UK horseraces on decision-making behaviour within the parimutuel and the parallel bookmaker-based betting markets. The results offer strong evidence for the existence of the favourite-longshot bias in bookmaker-based markets, with a corresponding absence of such an effect in the parimutuel case. These results offer support for the view that the origins of the favourite-longshot bias lie principally in the decisions of bookmakers rather than in the decisions of bettors.

Bets and Bids: Favorite-Longshot Bias and Winner's Curse

A well-documented anomaly in racetrack betting is that the expected return per dollar bet on a horse increases with the probability of the horse winning. This so-called favorite-longshot bias is at odds with the presumptions of market efficiency.We show that the bias is consistent with betters having myopic beliefs.If betters neglect the fact the popularity of a horse indicates that other people have favorable information about that horse, then they bet less on the favorite than they should.This myopia is related to, though stronger than, the judgmental bias that lead to the winner's curse in auctions.

Why is There a Favourite-Longshot Bias in British Racetrack Betting Markets

In this paper, the authors employ a large new data set to examine explanations of the tendency for favorites to be under-bet and longshots over-bet in recent British racetrack betting markets. They demonstrate that both demand-and-supply side factors can explain this favorite-longshot bias and propose new empirical tests to identify the influence of insider trading on the bias. The results suggest that the adverse selection problem faced by bookmakers, in the context of bettors who may possess superior information, is capable of explaining at least some of the observed bias. Copyright 1997 by Royal Economic Society.

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

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.

Market efficiency in Scandinavian racetrack betting

This study analyzes Scandinavian racetrack betting markets. We discuss market efficiency and investor behavior in light of the fact that investors earn negative returns on average. Show bets on favorites in Norway yield a small positive return, while all the other betting markets are weak form efficient. We establish the favorite-longshot bias for quinella and exactor bettors, but not for win bettors. Our results can be explained by small pools and high track takes. Investors wagering at the racetrack have a different risk attitude than investors wagering off the track. We explain how our results should influence the design of betting products, especially with respect to the fraction of the pool returned to winners.