IDEAS home Printed from https://ideas.repec.org/a/buc/jgbeco/v2y2008i2p79-96.html
   My bibliography  Save this article

An Alternative Explanation of the Favorite-Longshot Bias

Author

Listed:
  • Martin Kukuk

    (University of Wurzburg)

  • Stefan Winter

    (University of Bochum)

Abstract

Empirical studies of horse race betting in the US, the UK, Australia, and Germany have empirically established the so called favorite-longshot bias. It was found that bets on longshots on average lose much more than bets on favorites. The theoretical literature on wagering markets has offered a variety of explanations for that bias. One of the most prominent is the assumption of a homogeneous bettor population with a preference for risk. However, the risk-love explanation has also been severely challenged. We add to this challenge by proposing a different explanation of the favorite-longshot bias. We show that if populations of bettors have only noisy estimates of horses' true winning probabilities, a favorite-longshot bias will be the market equilibrium outcome even with risk neutral bettors and even if the median estimate is correct. We provide evidence on four different types of bets broadly consistent with the noisy estimates assumption but not with the risk-love explanation.

Suggested Citation

  • Martin Kukuk & Stefan Winter, 2008. "An Alternative Explanation of the Favorite-Longshot Bias," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 2(2), pages 79-96, September.
    • Handle: RePEc:buc:jgbeco:v:2:y:2008:i:2:p:79-96
    as

    Download full text from publisher

    File URL: http://www.ubplj.org/index.php/jgbe/article/view/532
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Russell Sobel & S. Travis Raines, 2003. "An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting," Applied Economics, Taylor & Francis Journals, vol. 35(4), pages 371-385.
    2. 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, August.
    3. Richard E. Quandt, 1986. "Betting and Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(1), pages 201-207.
    4. repec:bla:econom:v:43:y:1976:i:17:p:139-50 is not listed on IDEAS
    5. 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.
    6. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    7. Schnytzer, Adi & Shilony, Yuval, 1995. "Inside Information in a Betting Market," Economic Journal, Royal Economic Society, vol. 105(431), pages 963-971, July.
    8. Raymond D. Sauer, 1998. "The Economics of Wagering Markets," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2021-2064, December.
    9. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60(2), pages 151-151.
    10. Swidler, Steve & Shaw, Ron, 1995. "Racetrack wagering and the "uninformed" bettor: A study of market efficiency," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(3), pages 305-314.
    11. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    12. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
    13. Bird, Ron & McCrae, Michael & Beggs, John J, 1987. "Are Gamblers Really Risk Takers?," Australian Economic Papers, Wiley Blackwell, vol. 26(49), pages 237-253, December.
    14. Martin Weitzman, 2008. "Utility Analysis And Group Behavior An Empirical Study," World Scientific Book Chapters, in: Donald B Hausch & Victor SY Lo & William T Ziemba (ed.), Efficiency Of Racetrack Betting Markets, chapter 9, pages 47-55, World Scientific Publishing Co. Pte. Ltd..
    15. Hyun Song Shin, 2008. "Prices Of State Contingent Claims With Insider Traders, And The Favourite-Longshot Bias," World Scientific Book Chapters, in: Donald B Hausch & Victor SY Lo & William T Ziemba (ed.), Efficiency Of Racetrack Betting Markets, chapter 34, pages 343-352, World Scientific Publishing Co. Pte. Ltd..
    16. Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.
    17. 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 150-158, January.
    18. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    19. Vaughan Williams,Leighton (ed.), 2005. "Information Efficiency in Financial and Betting Markets," Cambridge Books, Cambridge University Press, number 9780521816038, September.
    20. Busche, Kelly & Hall, Christopher D, 1988. "An Exception to the Risk Preference Anomaly," The Journal of Business, University of Chicago Press, vol. 61(3), pages 337-346, July.
    21. John Gandar & Richard Zuber & R. Stafford Johnson, 2001. "Searching for the favourite-longshot bias down under: an examination of the New Zealand pari-mutuel betting market," Applied Economics, Taylor & Francis Journals, vol. 33(13), pages 1621-1629.
    22. M. Cain & D. Peel & D. Law, 2002. "Skewness as an explanation of gambling by locally risk averse agents," Applied Economics Letters, Taylor & Francis Journals, vol. 9(15), pages 1025-1028.
    23. 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.
    24. Michael A. Smith & David Paton & Leighton Vaughan Williams, 2006. "Market Efficiency in Person‐to‐Person Betting," Economica, London School of Economics and Political Science, vol. 73(292), pages 673-689, November.
    25. Joseph Golec & Maurry Tamarkin, 1998. "Bettors Love Skewness, Not Risk, at the Horse Track," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 205-225, February.
    26. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
    27. Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-1118, September.
    28. Shin, Hyun Song, 1993. "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal, Royal Economic Society, vol. 103(420), pages 1141-1153, September.
    29. Kelly Busche & W. David Walls, 2001. "Breakage and betting market efficiency: evidence from the horse track," Applied Economics Letters, Taylor & Francis Journals, vol. 8(9), pages 601-604.
    30. Hausch, Donald B & Ziemba, William T, 1990. "Arbitrage Strategies for Cross-Track Betting on Major Horse Races," The Journal of Business, University of Chicago Press, vol. 63(1), pages 61-78, January.
    31. Stefan Winter & Martin Kukuk, 2006. "Risk Love and the Favorite-Longshot Bias: Evidence from German Harness Horse Racing," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 58(4), pages 349-364, October.
    32. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
    33. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-174, Spring.
    34. Tuckwell, R H, 1983. "The Thoroughbred Gambling Market: Efficiency, Equity and Related Issues," Australian Economic Papers, Wiley Blackwell, vol. 22(4), pages 106-118, June.
    35. Stefan Winter & Martin Kukuk, 2008. "Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 75-87.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stefan Winter & Martin Kukuk, 2008. "Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 75-87.
    2. M. Sung & J. E. V. Johnson, 2010. "Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies," Economica, London School of Economics and Political Science, vol. 77(305), pages 128-147, January.
    3. John Peirson & Michael A. Smith, 2010. "Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior," Southern Economic Journal, John Wiley & Sons, vol. 76(4), pages 976-992, April.
    4. Jinook Jeong & Jee Young Kim & Yoon Jae Ro, 2019. "On the efficiency of racetrack betting market: a new test for the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 51(54), pages 5817-5828, November.
    5. Alistair C. Bruce & Johnnie E. V. Johnson & John D. Peirson & Jiejun Yu, 2009. "An Examination of the Determinants of Biased Behaviour in a Market for State Contingent Claims," Economica, London School of Economics and Political Science, vol. 76(302), pages 282-303, April.
    6. Philip W. S. Newall & Dominic Cortis, 2021. "Are Sports Bettors Biased toward Longshots, Favorites, or Both? A Literature Review," Risks, MDPI, vol. 9(1), pages 1-9, January.
    7. 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, August.
    8. Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.
    9. Restocchi, Valerio & McGroarty, Frank & Gerding, Enrico & Johnson, Johnnie E.V., 2018. "It takes all sorts: A heterogeneous agent explanation for prediction market mispricing," European Journal of Operational Research, Elsevier, vol. 270(2), pages 556-569.
    10. Ziemba, William, 2020. "Parimutuel betting markets: racetracks and lotteries revisited," LSE Research Online Documents on Economics 118873, London School of Economics and Political Science, LSE Library.
    11. Ariane Charpin, 2018. "Tests des modèles de décision en situation de risque. Le cas des parieurs hippiques en France," Revue économique, Presses de Sciences-Po, vol. 69(5), pages 779-803.
    12. Lionel Page & Robert T. Clemen, 2013. "Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?-super-," Economic Journal, Royal Economic Society, vol. 123(568), pages 491-513, May.
    13. Jullien, Bruno & Salanié, Bernard, 2005. "Empirical Evidence on the Preferences of Racetrack Bettors," IDEI Working Papers 178, Institut d'Économie Industrielle (IDEI), Toulouse.
    14. Jaiho Chung & Joon Ho Hwang, 2010. "An Empirical Examination of the Parimutuel Sports Lottery Market versus the Bookmaker Market," Southern Economic Journal, John Wiley & Sons, vol. 76(4), pages 884-905, April.
    15. Goto, Shingo & Yamada, Toru, 2023. "What drives biased odds in sports betting markets: Bettors’ irrationality and the role of bookmakers," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 252-270.
    16. Leighton Vaughan Williams & Ming‐Chien Sung & Peter A. F. Fraser‐Mackenzie & John Peirson & Johnnie E. V. Johnson, 2018. "Towards an Understanding of the Origins of the Favourite–Longshot Bias: Evidence from Online Poker Markets, a Real‐money Natural Laboratory," Economica, London School of Economics and Political Science, vol. 85(338), pages 360-382, April.
    17. Yu, Dian & Gao, Jianjun & Wang, Tongyao, 2022. "Betting market equilibrium with heterogeneous beliefs: A prospect theory-based model," European Journal of Operational Research, Elsevier, vol. 298(1), pages 137-151.
    18. Stewart Hodges & Hao Lin & Lan Liu, 2013. "Fixed Odds Bookmaking with Stochastic Betting Demands," European Financial Management, European Financial Management Association, vol. 19(2), pages 399-417, March.
    19. Egon Franck & Erwin Verbeek & Stephan Nüesch, 2011. "Sentimental Preferences and the Organizational Regime of Betting Markets," Southern Economic Journal, John Wiley & Sons, vol. 78(2), pages 502-518, October.
    20. Maschke Mario & Schmidt Ulrich, 2011. "Das Wettmonopol in Deutschland: Status quo und Reformansätze," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 60(1), pages 110-124, April.

    More about this item

    Keywords

    HORSE RACE; BETTING; RISK; MARKET EQUILIBRIUM; FAVORITE-LONGSHOT-BIAS; NOISY PROBABILITY ESTIMATES;
    All these keywords.

    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

    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:buc:jgbeco:v:2:y:2008:i:2:p:79-96. See general information about how to correct material in RePEc.

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dominic Cortis, University of Malta (email available below). General contact details of provider: http://www.ubpl.co.uk/ .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.