Surprised by the Parimutuel Odds?
Marco Ottaviani, Peter Norman Sørensen
American Economic Review · 2009 · Volume 99 · Issue 5
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. (JEL D81, D82, L83)
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Asymmetric and Private Information, Sports, Gambling, Recreation, Tourism
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