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The Relative Importance of Strength and Weight in Processing New Information in the College Football Betting Market

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  • Greg Durham
  • Mukunthan Santhanakrishnan
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    Abstract

    Griffin and Tversky (1992) suggest that individuals, when formulating posterior probabilities based on the available evidence, tend to overreact to a new piece of evidence's strength while underreacting to the relative importance of its weight. We test this prediction using the college football betting market, a market that is commonly employed in tests for efficiency and rationality. Using average points in excess of the spread and streak against the spread as measures for strength and weight, respectively, we find that bettors overreact to strength and underreact to weight. These results are consistent with the predictions of Griffin and Tversky, as well as with the findings of Sorescu and Subrahmanyam (2006) and Barberis, Shleifer, and Vishny (1998) in financial market settings. Our work also provides insight into how behavioral biases might affect price-formation processes in other markets.

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    Bibliographic Info

    Article provided by University of Buckingham Press in its journal Journal of Prediction Markets.

    Volume (Year): 2 (2008)
    Issue (Month): 2 (September)
    Pages: 13-28

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    Handle: RePEc:buc:jpredm:v:2:y:2008:i:2:p:13-28

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    Web: http://www.predictionmarketjournal.com/index_files/Page418.htm

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