IDEAS home Printed from https://ideas.repec.org/p/kud/kuiefr/200412.html
   My bibliography  Save this paper

The Timing of Bets and the Favorite-Longshot Bias

Author

Listed:
  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sørensen

    (Institute of Economics, University of Copenhagen)

Abstract

In parimutuel betting markets, it has been observed that proportionally too many bets are placed on longshots, late bets are more informative than early bets, and a sizeable fraction of bets are placed early. We propose an explanation for these facts based on equilibrium incentives of privately informed rational bettors, who profit from betting against bettors with recreational motives. We show that small rational bettors who act on private information have an incentive to wait until the last minute, and then bet without access to the information of the others. Once the distribution of bets is revealed, the longshot is recognized to be less likely to win than was originally thought. When acting on common information instead, bettors have an incentive to place early bets in order to preempt others from exploiting the same information.

Suggested Citation

  • Marco Ottaviani & Peter Norman Sørensen, 2004. "The Timing of Bets and the Favorite-Longshot Bias," FRU Working Papers 2004/12, University of Copenhagen. Department of Economics. Finance Research Unit.
  • Handle: RePEc:kud:kuiefr:200412
    as

    Download full text from publisher

    File URL: http://www.econ.ku.dk/FRU/WorkingPapers/PDF/2004/2004_12.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.
    2. Jianying Qiu, 2007. "Loss aversion and mental accounting: the favorite longshot bias in parimutuel betting," Jena Economic Research Papers 2007-017, Friedrich-Schiller-University Jena.

    More about this item

    Keywords

    parimutuel betting; favorite-longshot bias; private information; timing;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kud:kuiefr:200412. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann). General contact details of provider: http://edirc.repec.org/data/okokudk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.