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Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias

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  • Stefan Winter
  • Martin Kukuk

Abstract

One of the most striking empirical patterns of horse race betting markets is the favourite-longshot bias: Bets on favourites have dramatically higher expected returns than bets on longshots. The literature offers a couple of different, though not mutually exclusive, explanations based on risk preferences and probability perceptions. This article adds a new possible explanation: The favourite-longshot bias may be the rational answer of an honest audience to a simple, but highly lucrative cheating opportunity of insiders. We provide anecdotal evidence that the type of cheating we model here really takes place. What is more, by employing a large scale German data set we are able to demonstrate that the pattern of the favourite-longshot bias changes as the opportunity of cheating vanishes. The changes we observe are in accord with the cheating model we suggest.

Suggested Citation

  • Stefan Winter & Martin Kukuk, 2008. "Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 75-87.
  • Handle: RePEc:taf:applec:v:40:y:2008:i:1:p:75-87
    DOI: 10.1080/00036840701731538
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    References listed on IDEAS

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    Cited by:

    1. Parimal Kanti Bag & Bibhas Saha, 2010. "Betting in the Shadow of Match-Fixing," University of East Anglia Applied and Financial Economics Working Paper Series 011, School of Economics, University of East Anglia, Norwich, UK..
    2. Bag, Parimal Kanti & Saha, Bibhas, 2011. "Match-fixing under competitive odds," Games and Economic Behavior, Elsevier, vol. 73(2), pages 318-344.

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