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Bookmaker and pari-mutuel betting: Is a (reverse) favourite-longshot bias built-in?

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Listed:
  • Alexander K. Koch

    () (Department of Economics, Royal Holloway, University of London)

  • Hui-Fai Shing

    () (Department of Economics, Royal Holloway, University of London)

Abstract

A widely documented empirical regularity in gambling markets is that bets on high probability events (a race won by a ``favourite'') have higer expected returns than bets on low probability events (a ``longshot'' win). Such favourite-longshot (FL) biases however appear to be more severe and persistent in bookmaker markets than in pari-mutuel markets; the latter sometims exhibit no bias or a revers FL bias. Our results help understand these differences: the odds grid in bookmaker markets leads to a built-in FL bias, wheras that used in pari-mutuel betting pushes these markets toward a reverse FL bias.

Suggested Citation

  • Alexander K. Koch & Hui-Fai Shing, 2007. "Bookmaker and pari-mutuel betting: Is a (reverse) favourite-longshot bias built-in?," Royal Holloway, University of London: Discussion Papers in Economics 07/04, Department of Economics, Royal Holloway University of London.
  • Handle: RePEc:hol:holodi:0704
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    Keywords

    Gambling; Favourite-Lonshot Bias; Bookmaker betting; Parimutuel Betting; Breakage; Tick Size.;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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