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

17 Pages Posted: 11 Jun 1997

See all articles by Johannes (Jan) J. M. Potters

Johannes (Jan) J. M. Potters

Tilburg University - CentER

Jorgen G. de Wit

University of Amsterdam - SEO Economic Research

Date Written: Undated

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

Suggested Citation

Potters, Johannes (Jan) J. M. and de Wit, Jorgen G., Bets and Bids: Favorite-Longshot Bias and Winner's Curse (Undated). Available at SSRN: https://ssrn.com/abstract=2053 or http://dx.doi.org/10.2139/ssrn.2053

Johannes (Jan) J. M. Potters (Contact Author)

Tilburg University - CentER ( email )

Department of Economics
P.O. Box 90153
5000 LE Tilburg
Netherlands
+31 13 466 8204 (Phone)
+31 13 466 3042 (Fax)

Jorgen G. De Wit

University of Amsterdam - SEO Economic Research ( email )

Roetersstraat 29
Amsterdam, 1018 WB
Netherlands

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