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Favorite-Longshot Bias in Parimutuel Betting: an Evolutionary Explanation

Listed author(s):
  • Atsushi Kajii

    ()

    (Institute of Economic Research, Kyoto University)

  • Takahiro Watanabe

    (Tokyo Metropolitan University)

We offer an evolutionary explanation for the favorite-longshot bias in pari-mutuel betting, in a simple evolutionary market model. Because of a positive track take, the expected returns of any strategy stay negative and so any agent must vanish in the long run. Those who bet on favorites lose steadily whereas those who favor long shots have some chances of getting ahead with rare but large gains to survive longer. This relative advantage results in overvaluation of long shots.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP907.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 907.

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Length: 23pages
Date of creation: Dec 2014
Handle: RePEc:kyo:wpaper:907
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  1. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions?," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 723-746, 08.
  2. Martin Weitzman, 2008. "Utility Analysis And Group Behavior An Empirical Study," World Scientific Book Chapters,in: Efficiency Of Racetrack Betting Markets, chapter 9, pages 47-55 World Scientific Publishing Co. Pte. Ltd..
  3. Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-815, August.
  4. Hurley, William & McDonough, Lawrence, 1995. "A Note on the Hayek Hypothesis and the Favorite-Longshot Bias in Parimutuel Betting," American Economic Review, American Economic Association, vol. 85(4), pages 949-955, September.
  5. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  6. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
  7. Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-1118, September.
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