The Favorite-Longshot Midas
54 Pages Posted: 14 Nov 2018
Date Written: February 15, 2019
Deception underlies a classic case of market inefficiency: the favorite-longshot bias in horserace parimutuel markets. Racetracks provide bettors with predictions. At some tracks, these predictions are well calibrated, and markets are efficient. Other tracks overestimate the chances of longshots; at these tracks, longshots are overbet. The deception is strategic. Deception facilitates arbitrage, and arbitrage generates additional income for the track.
Keywords: brokers, deception, arbitrage, parallax and tax, favorite-longshot bias
JEL Classification: D22, D82, D83, L83
Suggested Citation: Suggested Citation