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The Implications Of A Reverse Favourite-Longshot Bias In A Prediction Market

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  • Richard Borghesi

Abstract

We examine 330,857 trades of prediction market contracts, the values of which are based on against-the-spread outcomes of NFL games, and find the presence of a significant reverse favourite-longshot bias. Surprisingly, the timing of this bias is identical to that observed in traditional casino-style NFL betting markets. That is, late-season away favourites so profoundly underperform expectations that the set of all favourites underperforms on average. Prior research shows that in prediction markets having asset prices ranging from $0 to $100, win rates are below (above) expectations when prices are low (high). However, we show that observed win rates for contracts on late-season away favourites are below expectations across all prices. The presence of a strong RFL bias in a prediction market provides evidence against the theories that this bias is caused by line shading or due to the effects of unpredicted weather variables on team performance.

Suggested Citation

  • Richard Borghesi, 2012. "The Implications Of A Reverse Favourite-Longshot Bias In A Prediction Market," Journal of Prediction Markets, University of Buckingham Press, vol. 6(2), pages 12-21.
    • Handle: RePEc:buc:jpredm:v:6:y:2012:i:2:p:12-21
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    Cited by:

    1. Dagaev, Dmitry & Stoyan, Egor, 2020. "Parimutuel betting on the eSports duels: Evidence of the reverse favourite-longshot bias," Journal of Economic Psychology, Elsevier, vol. 81(C).
    2. Jinook Jeong & Jee Young Kim & Yoon Jae Ro, 2019. "On the efficiency of racetrack betting market: a new test for the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 51(54), pages 5817-5828, November.

    More about this item

    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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