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Late Informed Betting and the Favorite-Longshot Bias

  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sørensen

    (Institute of Economics, University of Copenhagen)

According to the favorite-longshot bias observed in parimutuel betting, the final distribution of bets overestimates the winning chance of longshots. This paper proposes an explanation of this bias based on late betting by small privately informed bettors. These bettors have an incentive to protect their private information and bet at the last minute, without knowing the bets simultaneously placed by the others. Once the distribution of bets is revealed, if bets are more informative than noisy, all bettors can recognize that the longshot is less likely to win than indicated by the distrubution of bets.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 03-33.

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Length: 26 pages
Date of creation: Jul 2003
Date of revision:
Handle: RePEc:kud:kuiedp:0333
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  1. Medrano, Luis Angel & Vives, Xavier, 2001. "Strategic Behavior and Price Discovery," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 221-48, Summer.
  2. Metrick, Andrew, 1996. "March madness? Strategic behavior in NCAA basketball tournament betting pools," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 159-172, August.
  3. Frederic Koessler & Anthony Ziegelmeyer, 2004. "Parimutuel Betting under Asymmetric Information," Papers on Strategic Interaction 2003-34, Max Planck Institute of Economics, Strategic Interaction Group.
  4. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
  5. Feeney, R. & King, S.P., 2000. "Sequential Parimutuel Games," Department of Economics - Working Papers Series 736, The University of Melbourne.
  6. Raymond D. Sauer, 1998. "The Economics of Wagering Markets," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2021-2064, December.
  7. Crafts, Nicholas F R, 1985. "Some Evidence of Insider Knowledge in Horse Race Betting in Britain," Economica, London School of Economics and Political Science, vol. 52(27), pages 295-304, August.
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