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Bets and Bids : Favorite-Longshot Bias and Winner's Curse

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  • Potters, J.J.M.

    (Tilburg University, School of Economics and Management)

  • Wit, J.

Abstract

A well-documented anomaly in racetrack betting is that the expected return per dollar bet on a horse increases with the probability of the horse winning. This socalled "favorite- longshot bias" is at odds with the presumptions of market efficiency. We offer a new solution to this much-debated puzzle which is related to another famous anomaly. We show that the bias can be explained by the same behavioral assumption that underlies the well-known "winner's curse" in common value auctions.
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Suggested Citation

  • Potters, J.J.M. & Wit, J., 1996. "Bets and Bids : Favorite-Longshot Bias and Winner's Curse," Other publications TiSEM 1a4df039-bf9e-4b6a-ab55-b, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:1a4df039-bf9e-4b6a-ab55-b275558046c5
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    Cited by:

    1. Feeney, Rob & King, Stephen P., 2001. "Sequential parimutuel games," Economics Letters, Elsevier, vol. 72(2), pages 165-173, August.
    2. Erik Eyster & Matthew Rabin, 2005. "Cursed Equilibrium," Econometrica, Econometric Society, vol. 73(5), pages 1623-1672, September.
    3. Erhan Bayraktar & Alexander Munk, 2016. "High-Roller Impact: A Large Generalized Game Model of Parimutuel Wagering," Papers 1605.03653, arXiv.org, revised Mar 2017.

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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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