Surprised by the Parimutuel Odds?
AbstractEmpirical analyses of parimutuel betting markets have documented that market probabilities of favorites (longshots) tend to underestimate (overestimate) the corresponding empirical probabilities. We argue that this favorite-longshot bias is consistent with bettors taking simultaneous positions on the basis of private information about the likelihood of different outcomes. The ex post realization of a high market probability indicates favorable information about the occurrence of an outcome -- and the opposite is true for longshots. This explanation for the bias relies on the bettors' inability to incorporate the surprise revealed by the final odds. (JEL D81, D82, L83)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 99 (2009)
Issue (Month): 5 (December)
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
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- Hurley, William & McDonough, Lawrence, 1995. "A Note on the Hayek Hypothesis and the Favorite-Longshot Bias in Parimutuel Betting," American Economic Review, American Economic Association, vol. 85(4), pages 949-55, September.
- Charles Moul & Joseph Keller, 2014. "Time to Unbridle U.S. Thoroughbred Racetracks? Lessons from Australian Bookies," Review of Industrial Organization, Springer, vol. 44(3), pages 211-239, May.
- Siemroth, Christoph, 2014. "Why prediction markets work : The role of information acquisition and endogenous weighting," Working Papers 14-02, University of Mannheim, Department of Economics.
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