Bets and Bids: Favorite-Longshot Bias and Winner's Curse

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 so-called favorite- longshot bias is at odds with the presumptions of market efficiency. We show that the bias is consistent with betters having myopic beliefs. If betters neglect the fact the popularity of a horse indicates that other people have favorable information about that horse, then they bet less on the favorite than they should. This myopia is related to, though stronger than, the judgmental bias that lead to the winner's curse in auctions.

JEL Classification: D83, D44