Do Expectations Reflect Information Reliability? Evidence From Odds of Tennis Matches
79 Pages Posted: 6 Apr 2016 Last revised: 11 May 2019
Date Written: May 9, 2019
We examine whether people form expectations by placing a larger weight on more reliable signals. To test this notion, we analyze the subjective probabilities inferred from the odds offered by professional bookmakers on the outcomes of men's tennis matches, exploiting the exogenous variation in information reliability related to whether a tennis match is played in a long or short format. The premise of our tests is that higher-skilled players, who are more likely to win any single set, will win more often in longer matches, where more sets are played. This notion, which is confirmed by the data, suggests that skill-related signals are relatively more reliable in longer matches and should thus affect the odds in those matches more strongly. However, we find that the likelihood of higher-skilled players winning in longer matches is systematically underestimated, which is costly to bookmakers. This result is robust to inferring expectations from the odds achieved through a person-to-person betting exchange. Various robustness tests, including a laboratory experiment and a placebo test using women’s tennis data, where all matches are played in the same length format, support our conclusions. Overall, our analysis suggests that information reliability neglect influences expectations in real-world markets.
Keywords: Bayes Rule, Decision Heuristics, Information Reliability, Underreaction
JEL Classification: D8, G1
Suggested Citation: Suggested Citation