Noise, Information and the Favorite-Longshot Bias
AbstractAccording to the favorite-longshot bias, longshots are overbet relative to favorites. We propose an explanation for this bias (and its reverse) based on an equilibrium model of informed betting in parimutuel markets. The bias arises because bettors take positions without knowing the positions simultaneously taken by other privately informed bettors. The direction and the extent of the bias depend on the amount of private information relative to noise present in the market. With realistic ex-post noise and ex-ante asymmetries, our model replicates the main qualitative features of expected returns observed in horse races.
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Bibliographic InfoPaper provided by www.najecon.org in its series NajEcon Working Paper Reviews with number 784828000000000397.
Date of creation: 02 Sep 2005
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Other versions of this item:
- 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.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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