The Implications of a Reverse Favourite-Longshot Bias in a Prediction Market

Journal of Prediction Markets 6(2), 12-21, 2012

16 Pages Posted: 25 Sep 2012

Date Written: May 18, 2012

Abstract

We examine 330,857 trades of prediction market contracts, the values of which are based on against-the-spread outcomes of NFL games, and find the presence of a significant reverse favourite-longshot bias. Surprisingly, the timing of this bias is identical to that observed in traditional casino-style NFL betting markets. That is, late-season away favourites so profoundly underperform expectations that the set of all favourites underperforms on average. Prior research shows that in prediction markets having asset prices ranging from $0 to $100, win rates are below (above) expectations when prices are low (high). However, we show that observed win rates for contracts on late-season away favourites are below expectations across all prices. The presence of a strong RFL bias in a prediction market provides evidence against the theories that this bias is caused by line shading or due to the effects of unpredicted weather variables on team performance.

Keywords: Prediction Market, Tradesports, Reverse Favorite Longshot Bias, Home Underdogs, Shading, Weather

Suggested Citation

Borghesi, Richard, The Implications of a Reverse Favourite-Longshot Bias in a Prediction Market (May 18, 2012). Journal of Prediction Markets 6(2), 12-21, 2012, Available at SSRN: https://ssrn.com/abstract=2151538

Richard Borghesi (Contact Author)

University of South Florida ( email )

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HOME PAGE: http://usfsm.edu/academics/faculty-listing/dr-richard-borghesi.aspx

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