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Why are some favourite-longshot biases positive and others negative?

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  • Leighton Vaughan Williams
  • David Paton

Abstract

Most studies of both pari-mutuel and fixed-odds betting markets have shown a systematic tendency for the expected return to bets at lower odds to exceed those at higher odds. Some work, however, has revealed in certain markets the absence or even reversal of this bias. We present a model which distinguishes two separate types of bettor, and use this to demonstrate how transactions costs, the extent of public information, and consumption benefits of betting can explain the disparities. Our empirical evidence, taken from a fixed-odds market, lends support to our theoretical conclusions.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:applec:v:30:y:1998:i:11:p:1505-1510
    DOI: 10.1080/000368498324841
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    References listed on IDEAS

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    1. Dowie, Jack A, 1976. "On the Efficiency and Equity of Betting Markets," Economica, London School of Economics and Political Science, vol. 43(17), pages 139-150, May.
    2. Swidler, Steve & Shaw, Ron, 1995. "Racetrack wagering and the "uninformed" bettor: A study of market efficiency," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(3), pages 305-314.
    3. Woodland, Linda M & Woodland, Bill M, 1994. " Market Efficiency and the Favorite-Longshot Bias: The Baseball Betting Market," Journal of Finance, American Finance Association, vol. 49(1), pages 269-279, March.
    4. Bird, Ron & McCrae, Michael & Beggs, John J, 1987. "Are Gamblers Really Risk Takers?," Australian Economic Papers, Wiley Blackwell, vol. 26(49), pages 237-253, December.
    5. Williams, Leighton Vaughan & Paton, David, 1997. "Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?," Economic Journal, Royal Economic Society, vol. 107(440), pages 150-158, January.
    6. 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.
    7. Terrell, Dek & Farmer, Amy, 1996. "Optimal Betting and Efficiency in Parimutuel Betting Markets with Information Costs," Economic Journal, Royal Economic Society, vol. 106(437), pages 846-868, July.
    8. Hurley, William & McDonough, Lawrence, 1995. "A Note on the Hayek Hypothesis and the Favorite-Longshot Bias in Parimutuel Betting," American Economic Review, American Economic Association, vol. 85(4), pages 949-955, September.
    9. Shin, Hyun Song, 1993. "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal, Royal Economic Society, vol. 103(420), pages 1141-1153, September.
    10. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-174, Spring.
    11. R. Bird & M. McCrae, 2008. "The Efficiency Of Racetrack Betting Markets: Australian Evidence," World Scientific Book Chapters,in: Efficiency Of Racetrack Betting Markets, chapter 57, pages 575-582 World Scientific Publishing Co. Pte. Ltd..
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    Citations

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    Cited by:

    1. Niko Suhonen, 2011. "Market Efficiency in Finnish Harness Horse Racing," Finnish Economic Papers, Finnish Economic Association, vol. 24(1), pages 55-63, Spring.
    2. Stekler, H.O. & Sendor, David & Verlander, Richard, 2010. "Issues in sports forecasting," International Journal of Forecasting, Elsevier, vol. 26(3), pages 606-621, July.
      • Herman O. Stekler & David Sendor & Richard Verlander, 2009. "Issues in Sports Forecasting," Working Papers 2009-002, The George Washington University, Department of Economics, Research Program on Forecasting.
    3. 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.
    4. Page, Lionel, 2009. "Is there an optimistic bias on betting markets?," Economics Letters, Elsevier, vol. 102(2), pages 70-72, February.
    5. Schmidt, Carsten & Strobel, Martin & Volkland, Henning Oskar, 2008. "Accuracy, certainty and surprise : a prediction market on the outcome of the 2002 FIFA World Cup," Papers 08-13, Sonderforschungsbreich 504.
    6. repec:eee:ecolet:v:156:y:2017:i:c:p:95-98 is not listed on IDEAS
    7. Russell Sobel & S. Travis Raines, 2003. "An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting," Applied Economics, Taylor & Francis Journals, vol. 35(4), pages 371-385.
    8. David Forrest & Ian Mchale, 2007. "Anyone for Tennis (Betting)?," The European Journal of Finance, Taylor & Francis Journals, vol. 13(8), pages 751-768.
    9. Les Coleman, 2007. "Just How Serious is Insider Trading? An Evaluation using Thoroughbred Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 31-55, February.
    10. Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.
    11. Benjamin Waggoner & Daniel Wines & Brian P. Soebbing & Chad S. Seifried & Jean Michael Martinez, 2014. "“Hot Hand” in the National Basketball Association Point Spread Betting Market: A 34-Year Analysis," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 2(4), pages 1-12, November.
    12. 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.
    13. Alistair C. Bruce & Johnnie E. V. Johnson & John D. Peirson & Jiejun Yu, 2009. "An Examination of the Determinants of Biased Behaviour in a Market for State Contingent Claims," Economica, London School of Economics and Political Science, vol. 76(302), pages 282-303, April.
    14. William Hurley & Lawrence McDonough, 2007. "Imperfect Market-Maker Competition, Heterogeneous Expectations, and The Favourite-Longshot Bias in Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 3-12, February.
    15. repec:eee:finlet:v:23:y:2017:i:c:p:174-178 is not listed on IDEAS
    16. Nikolaos Vlastakis & George Dotsis & Raphael N. Markellos, 2009. "How efficient is the European football betting market? Evidence from arbitrage and trading strategies," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(5), pages 426-444.
    17. Marshall Gramm & C. Nicholas McKinney & Douglas Owens, 2008. "The efficiency of exotic wagers in racetrack betting," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 89-97.

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