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Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias

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  • Stefan Winter
  • Martin Kukuk
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    Abstract

    One of the most striking empirical patterns of horse race betting markets is the favourite-longshot bias: Bets on favourites have dramatically higher expected returns than bets on longshots. The literature offers a couple of different, though not mutually exclusive, explanations based on risk preferences and probability perceptions. This article adds a new possible explanation: The favourite-longshot bias may be the rational answer of an honest audience to a simple, but highly lucrative cheating opportunity of insiders. We provide anecdotal evidence that the type of cheating we model here really takes place. What is more, by employing a large scale German data set we are able to demonstrate that the pattern of the favourite-longshot bias changes as the opportunity of cheating vanishes. The changes we observe are in accord with the cheating model we suggest.

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    Bibliographic Info

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

    Volume (Year): 40 (2008)
    Issue (Month): 1 ()
    Pages: 75-87

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    Handle: RePEc:taf:applec:v:40:y:2008:i:1:p:75-87

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    References

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