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Late Informed Betting and the Favorite-Longshot Bias

Author

Listed:
  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sørensen

    (Institute of Economics, University of Copenhagen)

Abstract

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.

Suggested Citation

  • Marco Ottaviani & Peter Norman Sørensen, 2003. "Late Informed Betting and the Favorite-Longshot Bias," Discussion Papers 03-33, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0333
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/2003/0333.pdf/
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    References listed on IDEAS

    as
    1. Medrano, Luis Angel & Vives, Xavier, 2001. "Strategic Behavior and Price Discovery," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 221-248, Summer.
    2. 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.
    3. Feeney, Rob & King, Stephen P., 2001. "Sequential parimutuel games," Economics Letters, Elsevier, vol. 72(2), pages 165-173, August.
    4. Koessler, Frédéric & Noussair, Charles & Ziegelmeyer, Anthony, 2008. "Parimutuel betting under asymmetric information," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 733-744, July.
    5. Raymond D. Sauer, 1998. "The Economics of Wagering Markets," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2021-2064, December.
    6. 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.
    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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    Cited by:

    1. Koessler, Frédéric & Noussair, Charles & Ziegelmeyer, Anthony, 2008. "Parimutuel betting under asymmetric information," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 733-744, July.

    More about this item

    Keywords

    parimutuel betting; insider information; endogenous sequencing;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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