The Favorite-Longshot Midas

54 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: February 15, 2019

Abstract

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

Green, Etan and Lee, Haksoo and Rothschild, David M., The Favorite-Longshot Midas (February 15, 2019). Available at SSRN: https://ssrn.com/abstract=3271248 or http://dx.doi.org/10.2139/ssrn.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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