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Bets and bids : favorite-longshot bias and winner's curse

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Author Info
Potters, J.
Wit, J. (Tilburg University, Center for Economic Research)

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Abstract

A well-documented anomaly in racetrack betting is that the expected return per dollar bet on a horse increases with the probability of the horse winning. This so-called favorite-longshot bias is at odds with the presumptions of market efficiency. We show that the bias is consistent with betters having myopic beliefs. If betters neglect the fact the popularity of a horse indicates that other people have favorable information about that horse, then they bet less on the favorite than they should. This myopia is related to, though stronger than, the judgmental bias that lead to the winner's curse in auctions.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 4.

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Date of creation: 1996
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Handle: RePEc:dgr:kubcen:19964

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References listed on IDEAS
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. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
  2. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June. [Downloadable!] (restricted)
  3. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-43, June. [Downloadable!] (restricted)
  4. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May. [Downloadable!] (restricted)
  5. Copeland, Thomas E & Friedman, Daniel, 1987. " The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study," Journal of Finance, American Finance Association, vol. 42(3), pages 763-97, July. [Downloadable!] (restricted)
  6. Kagel, John H & Levin, Dan, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 81(1), pages 362-69, March. [Downloadable!] (restricted)
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  7. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  9. Quandt, Richard E, 1986. "Betting and Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 201-07, February. [Downloadable!] (restricted)
  10. 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)
  11. 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)
  12. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
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Cited by:
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  1. Marco Ottaviani & Peter Norman Sørensen, 2003. "Late Informed Betting and the Favorite-Longshot Bias," Discussion Papers 03-33, University of Copenhagen. Department of Economics. [Downloadable!]
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  2. Feeney, R. & King, S.P., 2000. "Sequential Parimutuel Games," Department of Economics - Working Papers Series 736, The University of Melbourne. [Downloadable!]
  3. Marco Ottaviani & Peter Norman Sørensen, 2004. "The Timing of Bets and the Favorite-Longshot Bias," FRU Working Papers 2004/12, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
  4. 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:
  5. Erik Eyster & Matt Rabin, 2003. "Cursed Equilibrium," Method and Hist of Econ Thought 0303002, EconWPA. [Downloadable!]
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