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New light on the longshot bias

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  • Les Coleman

Abstract

The longshot bias is the tendency for bettors to put more money on horses with long odds than is justified by their objective probability of winning: thus favourites win more often than projected by their odds. This challenges normative assumptions as it means the return increases with the probability of winning. Even though the longshot bias is well-known, it has defied authoritative explanation. This article draws on studies of the longshot bias over 50 years across four continents to show that its nature is consistent with two bettor populations. One is risk-averse, knowledgeable about winners, backs favourites, believes in the gambler's fallacy, and has a positive expected return. The other, a larger group is risk loving, backs longshots, believes in hot hands, and has a significant, negative expected return. The crossover between the two groups occurs where the probability of a positive result is about 0.2. This matches the transition from risk aversion to risk embrace which has been found in a variety of behavioural studies.

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Bibliographic Info

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

Volume (Year): 36 (2004)
Issue (Month): 4 ()
Pages: 315-326

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Handle: RePEc:taf:applec:v:36:y:2004:i:4:p:315-326

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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.
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  4. W. David Walls & Kelly Busche, 2003. "Broken odds and the favourite-longshot bias in parimutuel betting: a direct test," Applied Economics Letters, Taylor & Francis Journals, vol. 10(5), pages 311-314, April.
  5. Cain, Michael & Law, David & Peel, David A, 2001. "The Incidence of Insider Trading in Betting Markets and the Gabriel and Marsden Anomaly," Manchester School, University of Manchester, vol. 69(2), pages 197-207, March.
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  15. Ron Bird & Michael McCrae, 1987. "Tests of the Efficiency of Racetrack Betting Using Bookmaker Odds," Management Science, INFORMS, vol. 33(12), pages 1552-1562, December.
  16. Alistair, B. & Johnson & J.E.V., 1999. "Toward an Explanation of the Favourite-Longshot Bias: A Decision-Making Perspective," Papers 99-145, University of Southampton - Department of Accounting and Management Science.
  17. Charles T. Clotfelter & Philip J. Cook, 1991. "The "Gambler's Fallacy" in Lottery Play," NBER Working Papers 3769, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Martin Kukuk & Stefan Winter, 2008. "An Alternative Explanation of the Favorite-Longshot Bias," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 2(2), pages 79-96, September.
  2. Page, Lionel, 2009. "Is there an optimistic bias on betting markets?," Economics Letters, Elsevier, vol. 102(2), pages 70-72, February.
  3. Stefan Winter & Martin Kukuk, 2008. "Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 75-87.
  4. Les Coleman, 2005. "Why explore for oil when it is cheaper to buy?," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 493-497.
  5. Bruce, A.C. & Johnson, J.E.V. & Peirson, J., 2012. "Recreational versus professional bettors: Performance differences and efficiency implications," Economics Letters, Elsevier, vol. 114(2), pages 172-174.
  6. Maschke, Mario & Schmidt, Ulrich, 2010. "Das Wettmonopol in Deutschland: Status Quo und Reformansätze," Kiel Policy Brief 18, Kiel Institute for the World Economy (IfW).
  7. Smith, Michael A. & Vaughan Williams, Leighton, 2010. "Forecasting horse race outcomes: New evidence on odds bias in UK betting markets," International Journal of Forecasting, Elsevier, vol. 26(3), pages 543-550, July.
  8. John Peirson & Michael A. Smith, 2010. "Symposium Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior," Southern Economic Journal, Southern Economic Association, vol. 76(4), pages 976-992, April.
  9. 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.

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