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Bets and bids: favorite-longshot bias and winner's curse

Author

Listed:
  • Jan Potters

    (Tilburg University)

  • Jorgen Wit

    (University of Amsterdam)

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.

Suggested Citation

  • Jan Potters & Jorgen Wit, 1997. "Bets and bids: favorite-longshot bias and winner's curse," Microeconomics 9706003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:9706003
    Note: Type of Document - WordPerfect; prepared on IBM PC; to print on HP Laserprinter 4; pages: 22 ; figures: included
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    References listed on IDEAS

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    8. 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..
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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

    Keywords

    parimutuel market; favorite-longshot bias;

    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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