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

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Author Info

  • Jan Potters

    (Tilburg University)

  • Jorgen Wit

    (University of Amsterdam)

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 socalled "favorite- longshot bias" is at odds with the presumptions of market efficiency. We offer a new solution to this much-debated puzzle which is related to another famous anomaly. We show that the bias can be explained by the same behavioral assumption that underlies the well-known "winner's curse" in common value auctions.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 9706003.

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Length: 22 pages
Date of creation: 16 Jun 1997
Date of revision:
Handle: RePEc:wpa:wuwpmi:9706003

Note: Type of Document - WordPerfect; prepared on IBM PC; to print on HP Laserprinter 4; pages: 22 ; figures: included
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Web page: http://128.118.178.162

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Keywords: parimutuel market; favorite-longshot bias;

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References

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  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. Quandt, Richard E, 1986. "Betting and Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 201-07, February.
  3. 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.
  4. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  5. John H. Kagel & Colin M. Campbell & Dan Levin, 1999. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 89(1), pages 325-334, March.
  6. 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.
  7. Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-18, September.
  8. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  9. 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.
  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.
  11. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  12. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-43, June.
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Cited by:
  1. Feeney, R. & King, S.P., 2000. "Sequential Parimutuel Games," Department of Economics - Working Papers Series 736, The University of Melbourne.
  2. Colquitt, L. Lee & Godwin, Norman H. & Swidler, Steve, 2004. "Betting on long shots in NCAA basketball games and implications for skew loving behavior," Finance Research Letters, Elsevier, vol. 1(2), pages 119-126, June.

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