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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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    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, H. O. Stekler Research Program on Forecasting.
    3. 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.
    4. Linda M. Woodland & Bill M. Woodland, 2003. "The Reverse Favourite–longshot Bias and Market Efficiency in Major League Baseball: An Update," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 113-123, April.
    5. 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.
    6. 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.
    7. 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.
    8. Restocchi, Valerio & McGroarty, Frank & Gerding, Enrico & Johnson, Johnnie E.V., 2017. "The impact of transaction costs on state-contingent claims mispricing," Finance Research Letters, Elsevier, vol. 23(C), pages 174-178.
    9. Niko Suhonen, 2011. "Market Efficiency in Finnish Harness Horse Racing," Finnish Economic Papers, Finnish Economic Association, vol. 24(1), pages 55-63, Spring.
    10. 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.
    11. Page, Lionel, 2009. "Is there an optimistic bias on betting markets?," Economics Letters, Elsevier, vol. 102(2), pages 70-72, February.
    12. 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.
    13. McGee, Richard J. & Johnson, Johnnie E.V., 2017. "Everyone’s a winner: The market impact of technologically advantaged agents," Economics Letters, Elsevier, vol. 156(C), pages 95-98.
    14. Philip W. S. Newall & Dominic Cortis, 2021. "Are Sports Bettors Biased toward Longshots, Favorites, or Both? A Literature Review," Risks, MDPI, Open Access Journal, vol. 9(1), pages 1-9, January.
    15. David Forrest & Ian Mchale, 2007. "Anyone for Tennis (Betting)?," The European Journal of Finance, Taylor & Francis Journals, vol. 13(8), pages 751-768.
    16. Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.
    17. Jinook Jeong & Jee Young Kim & Yoon Jae Ro, 2019. "On the efficiency of racetrack betting market: a new test for the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 51(54), pages 5817-5828, November.
    18. Sung, Ming-Chien & McDonald, David C.J. & Johnson, Johnnie E.V. & Tai, Chung-Ching & Cheah, Eng-Tuck, 2019. "Improving prediction market forecasts by detecting and correcting possible over-reaction to price movements," European Journal of Operational Research, Elsevier, vol. 272(1), pages 389-405.
    19. 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.
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    22. 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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