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An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting

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Russell S. Sobel
S. Travis Raines

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Abstract

Market efficiency dictates it equally profitable to bet on any racing participant, including the favourite or longshot. However, a well-documented anomaly is that racetrack bettors tend to overbet longshots and underbet favourites. This study presents and tests two theoretical explanations for this favourite-longshot bias. The unparalleled richness of the data allows the exploration of how the bias changes with several key variables. This study finds the most popular current explanation for the bias, the risk preference model, cannot explain the data as well as an information-based model, in which the bias depends on bet complexity and the information possessed by bettors.

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

Volume (Year): 35 (2003)
Issue (Month): 4 (January)
Pages: 371-385
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Handle: RePEc:taf:applec:v:35:y:2003:i:4:p:371-385

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. [Downloadable!] (restricted)
  2. Terrell, Dek, 1998. "Biases in Assessments of Probabilities: New Evidence from Greyhound Races," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 151-66, November. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Gandar, John, et al, 1988. " Testing Rationality in the Point Spread Betting Market," Journal of Finance, American Finance Association, vol. 43(4), pages 995-1008, September. [Downloadable!] (restricted)
  5. Asch, Peter & Quandt, Richard E, 1987. "Efficiency and Profitability in Exotic Bets," Economica, London School of Economics and Political Science, vol. 54(215), pages 289-98, August. [Downloadable!] (restricted)
  6. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-85, September. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  9. De Bondt, Werner F M & Thaler, Richard H, 1990. "Do Security Analysts Overreact?," American Economic Review, American Economic Association, vol. 80(2), pages 52-57, May. [Downloadable!] (restricted)
  10. Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-18, September. [Downloadable!] (restricted)
  11. Losey, Robert L & Talbott, John C, Jr, 1980. " Back on the Track with the Efficient Markets Hypothesis," Journal of Finance, American Finance Association, vol. 35(4), pages 1039-43, September. [Downloadable!] (restricted)
  12. Busche, Kelly & Hall, Christopher D, 1988. "An Exception to the Risk Preference Anomaly," Journal of Business, University of Chicago Press, vol. 61(3), pages 337-46, July. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
  15. Asch, Peter & Malkiel, Burton G & Quandt, Richard E, 1986. "Market Efficiency in Racetrack Betting: Further Evidence and a Correction," Journal of Business, University of Chicago Press, vol. 59(1), pages 157-60, January. [Downloadable!] (restricted)
  16. Zuber, Richard A & Gandar, John M & Bowers, Benny D, 1985. "Beating the Spread: Testing the Efficiency of the Gambling Market for National Football League Games," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 800-806, August. [Downloadable!] (restricted)
  17. 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. [Downloadable!] (restricted)
  18. Williams, Leighton Vaughan & Paton, David, 1998. "Why Are Some Favourite-Longshot Biases Positive and Others Negative?," Applied Economics, Taylor and Francis Journals, vol. 30(11), pages 1505-10, November. [Downloadable!] (restricted)
  19. Asch, Peter & Malkiel, Burton G & Quandt, Richard E, 1984. "Market Efficiency in Racetrack Betting," Journal of Business, University of Chicago Press, vol. 57(2), pages 165-75, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Ottaviani & Peter Norman Sørensen, 2006. "Noise, Information, and the Favorite-Longshot Bias," FRU Working Papers 2006/04, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
    Other versions:
  2. Marshall Gramm & Douglas H. Owens, 2005. "Determinants of betting market efficiency," Applied Economics Letters, Taylor and Francis Journals, vol. 12(3), pages 181-185, February. [Downloadable!] (restricted)
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