The Timing of Bets and the Favorite-Longshot Bias
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.
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