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Why are some favourite-longshot biases positive and others negative?

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Author Info

  • Leighton Vaughan Williams
  • David Paton

Abstract

Most studies of both pari-mutuel and fixed-odds betting markets have shown a systematic tendency for the expected return to bets at lower odds to exceed those at higher odds. Some work, however, has revealed in certain markets the absence or even reversal of this bias. We present a model which distinguishes two separate types of bettor, and use this to demonstrate how transactions costs, the extent of public information, and consumption benefits of betting can explain the disparities. Our empirical evidence, taken from a fixed-odds market, lends support to our theoretical conclusions.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/000368498324841
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 30 (1998)
Issue (Month): 11 ()
Pages: 1505-1510

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Handle: RePEc:taf:applec:v:30:y:1998:i:11:p:1505-1510

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References

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  1. Williams, Leighton Vaughan & Paton, David, 1997. "Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?," Economic Journal, Royal Economic Society, vol. 107(440), pages 150-58, January.
  2. Terrell, Dek & Farmer, Amy, 1996. "Optimal Betting and Efficiency in Parimutuel Betting Markets with Information Costs," Economic Journal, Royal Economic Society, vol. 106(437), pages 846-68, July.
  3. Bird, Ron & McCrae, Michael & Beggs, John J, 1987. "Are Gamblers Really Risk Takers?," Australian Economic Papers, Wiley Blackwell, vol. 26(49), pages 237-53, December.
  4. Woodland, Linda M & Woodland, Bill M, 1994. " Market Efficiency and the Favorite-Longshot Bias: The Baseball Betting Market," Journal of Finance, American Finance Association, vol. 49(1), pages 269-79, March.
  5. Busche, Kelly & Hall, Christopher D, 1988. "An Exception to the Risk Preference Anomaly," The Journal of Business, University of Chicago Press, vol. 61(3), pages 337-46, July.
  6. 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.
  7. Dowie, Jack A, 1976. "On the Efficiency and Equity of Betting Markets," Economica, London School of Economics and Political Science, vol. 43(17), pages 139-50, May.
  8. 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.
  9. Shin, Hyun Song, 1993. "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal, Royal Economic Society, vol. 103(420), pages 1141-53, September.
  10. Swidler, Steve & Shaw, Ron, 1995. "Racetrack wagering and the "uninformed" bettor: A study of market efficiency," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(3), pages 305-314.
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Citations

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Cited by:
  1. Les Coleman, 2007. "Just How Serious is Insider Trading? An Evaluation using Thoroughbred Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 31-55, February.
  2. Herman O. Stekler & David Sendor & Richard Verlander, 2009. "Issues in Sports Forecasting," Working Papers 2009-002, The George Washington University, Department of Economics, Research Program on Forecasting.
  3. Nikolaos Vlastakis & George Dotsis & Raphael N. Markellos, 2009. "How efficient is the European football betting market? Evidence from arbitrage and trading strategies," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(5), pages 426-444.
  4. Page, Lionel, 2009. "Is there an optimistic bias on betting markets?," Economics Letters, Elsevier, vol. 102(2), pages 70-72, February.
  5. Niko Suhonen, 2011. "Market Efficiency in Finnish Harness Horse Racing," Finnish Economic Papers, Finnish Economic Association, vol. 24(1), pages 55-63, Spring.
  6. Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.
  7. Russell Sobel & S. Travis Raines, 2003. "An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting," Applied Economics, Taylor & Francis Journals, vol. 35(4), pages 371-385.

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