Surprised by the Parimutuel Odds?

TY - JOUR

T1 - Surprised by the Parimutuel Odds?

AU - Ottaviani, Marco

AU - Sørensen, Peter Norman

N1 - JEL classification: D81, D82, L83

PY - 2009/12

Y1 - 2009/12

N2 - Empirical analyses of parimutuel betting markets have documented that market probabilities of favorites (longshots) tend to underestimate (overestimate) the corresponding empirical probabilities. We argue that this favorite-longshot bias is consistent with bettors taking simultaneous positions on the basis of private information about the likelihood of different outcomes. The ex post realization of a high market probability indicates favorable information about the occurrence of an outcome -- and the opposite is true for longshots. This explanation for the bias relies on the bettors' inability to incorporate the surprise revealed by the final odds.

AB - Empirical analyses of parimutuel betting markets have documented that market probabilities of favorites (longshots) tend to underestimate (overestimate) the corresponding empirical probabilities. We argue that this favorite-longshot bias is consistent with bettors taking simultaneous positions on the basis of private information about the likelihood of different outcomes. The ex post realization of a high market probability indicates favorable information about the occurrence of an outcome -- and the opposite is true for longshots. This explanation for the bias relies on the bettors' inability to incorporate the surprise revealed by the final odds.

U2 - 10.1257/aer.99.5.2129

DO - 10.1257/aer.99.5.2129

M3 - Journal article

SN - 0002-8282

VL - 99

SP - 2129

EP - 2134

JO - American Economic Review

JF - American Economic Review

IS - 5

ER -