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When the league table lies: Does outcome bias lead to informationally inefficient markets?

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  • Raphael Flepp
  • Oliver Merz
  • Egon Franck

Abstract

We study whether outcome bias persists in markets with actors who are financially incentivized to make optimal decisions. We test whether inherently noisy match outcomes from European football are correctly incorporated into prices from a betting exchange market. We find that market prices overestimate (underestimate) the winning probability of teams that previously overperformed (underperformed) in terms of match outcomes compared to their performance based on “expected goals.” This pattern is mirrored in negative (positive) betting returns on overperforming (underperforming) teams. These results suggest that even competitive market mechanisms fail to completely erase outcome bias.

Suggested Citation

  • Raphael Flepp & Oliver Merz & Egon Franck, 2024. "When the league table lies: Does outcome bias lead to informationally inefficient markets?," Economic Inquiry, Western Economic Association International, vol. 62(1), pages 414-429, January.
    • Handle: RePEc:bla:ecinqu:v:62:y:2024:i:1:p:414-429
    DOI: 10.1111/ecin.13163
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