The Favorite-Longshot Midas

42 Pages Posted: 14 Nov 2018

See all articles by Etan Green

Etan Green

Wharton - Operations, Information and Decisions

Haksoo Lee

Stanford Law School

David M. Rothschild

Microsoft Research - NYC

Date Written: June 4, 2018

Abstract

The favorite-longshot bias in horse-race betting markets, previously attributed to speculation or irrationality, instead results from profitable deception. Racetracks provide bettors with predictions that overestimate the chances of longshots and underestimate the chances of favorites. This deception creates arbitrage opportunities, which the track monetizes by taxing the arbitrageurs. Similar schemes enrich other market makers, such as investment banks during the boom in mortgage-backed securities.

Keywords: favorite-longshot bias, market makers, deception, behavioral industrial organization, betting markets

JEL Classification: D22, D82, D83, L83

Suggested Citation

Green, Etan and Lee, Haksoo and Rothschild, David M., The Favorite-Longshot Midas (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3271248

Etan Green (Contact Author)

Wharton - Operations, Information and Decisions ( email )

Philadelphia, PA 19104
United States

Haksoo Lee

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

David M. Rothschild

Microsoft Research - NYC ( email )

641 6th Ave., 7th Floor
New York, NY 10011
United States

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