Late Informed Betting and the Favourite-Longshot Bias

28 Pages Posted: 9 Dec 2003

See all articles by Marco Ottaviani

Marco Ottaviani

Bocconi University - Department of Economics

Peter Norman Sorensen

University of Copenhagen - Department of Economics

Date Written: October 2003

Abstract

According to the favorite-longshot bias observed in parimutuel betting, the final distribution of bets overestimates the winning chance of longshots. This Paper proposes an explanation of this bias based on late betting by small privately informed bettors. These bettors have an incentive to protect their private information and bet at the last minute, without knowing the bets simultaneously placed by the others. Once the distribution of bets is revealed, if bets are more informative than noisy, all bettors can recognize that the longshot is less likely to win than indicated by the distribution of bets.

Keywords: Parimutuel betting, favourite-longshot bias, private information, timing

JEL Classification: D43, D82, D84, G13, L83

Suggested Citation

Ottaviani, Marco and Sorensen, Peter Norman, Late Informed Betting and the Favourite-Longshot Bias (October 2003). Available at SSRN: https://ssrn.com/abstract=477381

Marco Ottaviani (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Peter Norman Sorensen

University of Copenhagen - Department of Economics ( email )

Oster Farimagsgade 5
Building 26
Copenhagen K, 1353
Denmark
+45 35 32 3056 (Phone)

HOME PAGE: http://www.econ.ku.dk/sorensen

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