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New light on the longshot bias

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  • Les Coleman

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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  • Les Coleman, 2004. "New light on the longshot bias," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 315-326.
    • Handle: RePEc:taf:applec:v:36:y:2004:i:4:p:315-326
    DOI: 10.1080/00036840410001674240
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    Cited by:

    1. Marshall Gramm & C. Nicholas McKinney & Douglas H. Owens & Matt E. Ryan, 2007. "What Do Bettors Want? Determinants of Pari‐Mutuel Betting Preference," American Journal of Economics and Sociology, Wiley Blackwell, vol. 66(3), pages 465-491, July.
    2. John Peirson & Michael A. Smith, 2010. "Symposium 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.
    3. 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.
    4. Smith, Michael A. & Vaughan Williams, Leighton, 2010. "Forecasting horse race outcomes: New evidence on odds bias in UK betting markets," International Journal of Forecasting, Elsevier, vol. 26(3), pages 543-550, July.
    5. 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.
    6. 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.
    7. Les Coleman, 2007. "Just How Serious is Insider Trading? An Evaluation using Thoroughbred Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 31-55, February.
    8. Vincenzo Candila & Lucio Palazzo, 2020. "Neural Networks and Betting Strategies for Tennis," Risks, MDPI, vol. 8(3), pages 1-19, June.
    9. N. Bhattacharya & T. A. Garrett, 2008. "Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 27-34.
    10. 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.
    11. 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.
    12. 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.
    13. John Peirson & Michael A. Smith, 2010. "Symposium Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior," Southern Economic Journal, Southern Economic Association, vol. 76(4), pages 976-992, April.
    14. Buhagiar, Ranier & Cortis, Dominic & Newall, Philip W.S., 2018. "Why do some soccer bettors lose more money than others?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 18(C), pages 85-93.
    15. Kurihara Kazutaka & Yohei Tutiya, 2018. "Efficiency in Micro-Behaviors and FL Bias," Papers 1805.04225, arXiv.org.
    16. 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.
    17. Page, Lionel, 2009. "Is there an optimistic bias on betting markets?," Economics Letters, Elsevier, vol. 102(2), pages 70-72, February.
    18. Bruce, A.C. & Johnson, J.E.V. & Peirson, J., 2012. "Recreational versus professional bettors: Performance differences and efficiency implications," Economics Letters, Elsevier, vol. 114(2), pages 172-174.
    19. Lionel Page, 2012. "‘It ain’t over till it's over.’ Yogi Berra bias on prediction markets," Applied Economics, Taylor & Francis Journals, vol. 44(1), pages 81-92, January.
    20. 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.
    21. 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.
    22. June Buchanan & Yun Shen, 2021. "Gambling and marketing: a systematic literature review using HistCite," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 2837-2851, June.
    23. Les Coleman, 2005. "Why explore for oil when it is cheaper to buy?," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 493-497.
    24. Marshall Gramm & C. Nicholas McKinney & Douglas Owens, 2008. "The efficiency of exotic wagers in racetrack betting," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 89-97.
    25. 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.

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