Abstract
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.
| Original language | English |
|---|---|
| Journal | American Economic Review (Print Edition) |
| Volume | 99 |
| Issue number | 5 |
| Pages (from-to) | 2129-2134 |
| Number of pages | 6 |
| ISSN | 0002-8282 |
| DOIs | |
| Publication status | Published - Dec 2009 |