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New light on the longshot bias

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Author Info
Les Coleman

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Abstract

The longshot bias is the tendency for bettors to put more money on horses with long odds than is justified by their objective probability of winning: thus favourites win more often than projected by their odds. This challenges normative assumptions as it means the return increases with the probability of winning. Even though the longshot bias is well-known, it has defied authoritative explanation. This article draws on studies of the longshot bias over 50 years across four continents to show that its nature is consistent with two bettor populations. One is risk-averse, knowledgeable about winners, backs favourites, believes in the gambler's fallacy, and has a positive expected return. The other, a larger group is risk loving, backs longshots, believes in hot hands, and has a significant, negative expected return. The crossover between the two groups occurs where the probability of a positive result is about 0.2. This matches the transition from risk aversion to risk embrace which has been found in a variety of behavioural studies.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 4 (March)
Pages: 315-326
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Handle: RePEc:taf:applec:v:36:y:2004:i:4:p:315-326

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-74, Spring. [Downloadable!] (restricted)
  2. Cain, Michael & Law, David & Peel, David A, 2001. "The Incidence of Insider Trading in Betting Markets and the Gabriel and Marsden Anomaly," Manchester School, University of Manchester, vol. 69(2), pages 197-207, March. [Downloadable!] (restricted)
  3. Alistair, B. & Johnson & J.E.V., 1999. "Toward an Explanation of the Favourite-Longshot Bias: A Decision-Making Perspective," Papers 99-145, University of Southampton - Department of Accounting and Management Science.
  4. Cain, Michael & Law, David & Peel, David A, 2001. "The Relationship between Two Indicators of Insider Trading in British Racetrack Betting," Economica, London School of Economics and Political Science, vol. 68(269), pages 97-104, February. [Downloadable!] (restricted)
  5. Losey, Robert L & Talbott, John C, Jr, 1980. " Back on the Track with the Efficient Markets Hypothesis," Journal of Finance, American Finance Association, vol. 35(4), pages 1039-43, September. [Downloadable!] (restricted)
  6. Williams, Leighton Vaughan & Paton, David, 1997. "Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?," Economic Journal, Royal Economic Society, vol. 107(440), pages 150-58, January. [Downloadable!] (restricted)
  7. W. David Walls & Kelly Busche, 2003. "Broken odds and the favourite-longshot bias in parimutuel betting: a direct test," Applied Economics Letters, Taylor and Francis Journals, vol. 10(5), pages 311-314, April. [Downloadable!] (restricted)
  8. Bird, Ron & McCrae, Michael & Beggs, John J, 1987. "Are Gamblers Really Risk Takers?," Australian Economic Papers, Blackwell Publishing, vol. 26(49), pages 237-53, December.
  9. Williams, Leighton Vaughan & Paton, David, 1998. "Why Are Some Favourite-Longshot Biases Positive and Others Negative?," Applied Economics, Taylor and Francis Journals, vol. 30(11), pages 1505-10, November. [Downloadable!] (restricted)
  10. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  11. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June. [Downloadable!] (restricted)
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  12. Schoemaker, Paul J H, 1993. " Determinants of Risk-Taking: Behavioral and Economic Views," Journal of Risk and Uncertainty, Springer, vol. 6(1), pages 49-73, January.
  13. Gabriel, Paul E & Marsden, James R, 1990. "An Examination of Market Efficiency in British Racetrack Betting," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 874-85, August. [Downloadable!] (restricted)
  14. Charles T. Clotfelter & Philip J. Cook, 1991. "The "Gambler's Fallacy" in Lottery Play," NBER Working Papers 3769, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Busche, Kelly & Hall, Christopher D, 1988. "An Exception to the Risk Preference Anomaly," Journal of Business, University of Chicago Press, vol. 61(3), pages 337-46, July. [Downloadable!] (restricted)
  16. Busche, Kelly & Walls, W David, 2001. "Breakage and Betting Market Efficiency: Evidence from the Horse Track," Applied Economics Letters, Taylor and Francis Journals, vol. 8(9), pages 601-04, September. [Downloadable!] (restricted)
  17. Kanto, Antti J. & Rosenqvist, Gunnar & Suvas, Arto, 1992. "On utility function estimation of racetrack bettors," Journal of Economic Psychology, Elsevier, vol. 13(3), pages 491-498, September. [Downloadable!] (restricted)
  18. Asch, Peter & Malkiel, Burton G & Quandt, Richard E, 1984. "Market Efficiency in Racetrack Betting," Journal of Business, University of Chicago Press, vol. 57(2), pages 165-75, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Les Coleman, 2005. "Why explore for oil when it is cheaper to buy?," Applied Economics Letters, Taylor and Francis Journals, vol. 12(8), pages 493-497, June. [Downloadable!] (restricted)
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