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Surprised by the Parimutuel Odds?

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  • Marco Ottaviani
  • Peter Norman Sørensen

Abstract

Empirical 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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2129
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 5 (December)
Pages: 2129-34

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:5:p:2129-34

Note: DOI: 10.1257/aer.99.5.2129
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  1. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-74, Spring.
  2. Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-15, August.
  3. 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.
  4. Asch, Peter & Malkiel, Burton G. & Quandt, Richard E., 1982. "Racetrack betting and informed behavior," Journal of Financial Economics, Elsevier, vol. 10(2), pages 187-194, July.
  5. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-85, September.
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