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Broken odds and the favourite-longshot bias in parimutuel betting: a direct test

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  • W. David Walls
  • Kelly Busche

Abstract

This research examines empirically the effect using broken odds - the rounded off odds reported by horse track operators - on statistical tests of market efficiency in parimutuel gambling. It finds that using rounded-off odds to test for market efficiency, instead of using the exact values, introduces a downward bias in the test statistics for favourite horses. Previous studies, because they relied on the rounded-off odds data, may have overstated the extent of the favourite-longshot bias in parimutuel wagering markets.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:apeclt:v:10:y:2003:i:5:p:311-314
    DOI: 10.1080/13504850210147162
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    References listed on IDEAS

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    1. Asch, Peter & Malkiel, Burton G. & Quandt, Richard E., 1982. "Racetrack betting and informed behavior," Journal of Financial Economics, Elsevier, vol. 10(2), pages 187-194, July.
    2. Leighton Vaughan Williams & David Paton, 1998. "Why are some favourite-longshot biases positive and others negative?," Applied Economics, Taylor & Francis Journals, vol. 30(11), pages 1505-1510.
    3. Busche, Kelly & Hall, Christopher D, 1988. "An Exception to the Risk Preference Anomaly," The Journal of Business, University of Chicago Press, vol. 61(3), pages 337-346, July.
    4. Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-815, August.
    5. Richard N. Rosett, 1965. "Gambling and Rationality," Journal of Political Economy, University of Chicago Press, vol. 73, pages 595-595.
    6. Asch, Peter & Quandt, Richard E, 1987. "Efficiency and Profitability in Exotic Bets," Economica, London School of Economics and Political Science, vol. 54(215), pages 289-298, August.
    7. Kelly Busche & W. David Walls, 2001. "Breakage and betting market efficiency: evidence from the horse track," Applied Economics Letters, Taylor & Francis Journals, vol. 8(9), pages 601-604.
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    Cited by:

    1. Jinook Jeong & Jee Young Kim & Yoon Jae Ro, 2017. "On the Efficiency of Racetrack Betting Market: A New Test for the Favorite-Longshot Bias," Working papers 2017rwp-106, Yonsei University, Yonsei Economics Research Institute.
    2. Anil Gulati & Shekar Shetty, 2007. "Empirical evidence of error in pricing of favorites and longshots in greyhound racing," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 31(1), pages 49-58, March.
    3. N. Bhattacharya & T. A. Garrett, 2008. "Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 27-34.
    4. Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.

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