The Economic Significance of the Longshot Bias in Horse Race Wagering
15 Pages Posted: 2 Jul 2007
Date Written: June 2007
Bets on longshots account for a small fraction of the total amount of money wagered, yet previous research treats bets on longshots as equal to bets on favorites. By value-weighting horses to represent the experience of bettors in aggregate, the favorite-longshot bias is shown to be only one-third as strong. Striking reductions in the longshot effect is found: returns to the longshot portfolio rise from -60% to -13% when value-weighting is used. Because the longshot effect is caused by very small amounts of money, it could be a function of "blind money" bet by people connected to the horse, such as an owner. As owners' blind money would become a smaller fraction of bets as total betting pools rise, evidence that the longshot effect falls as pools increase, and disappears when pools are extremely large, is consistent with this proposition.
Keywords: horse, betting, wagering, longshot, favorite-longshot effect, value-weighting
JEL Classification: D81
Suggested Citation: Suggested Citation