Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v99y2009i5p2129-34.html
   My bibliography  Save this article

Surprised by the Parimutuel Odds?

Author

Listed:
  • Marco Ottaviani
  • Peter Norman Sørensen
Abstract
Empirical analyses of parimutuel betting markets have documented that market probabilities of favorites (longshots) tend to underestimate (overestimate) the corresponding empirical probabilities. We argue that this favorite-longshot bias is consistent with bettors taking simultaneous positions on the basis of private information about the likelihood of different outcomes. The ex post realization of a high market probability indicates favorable information about the occurrence of an outcome -- and the opposite is true for longshots. This explanation for the bias relies on the bettors' inability to incorporate the surprise revealed by the final odds. (JEL D81, D82, L83)

Suggested Citation

  • Marco Ottaviani & Peter Norman Sørensen, 2009. "Surprised by the Parimutuel Odds?," American Economic Review, American Economic Association, vol. 99(5), pages 2129-2134, December.
    • Handle: RePEc:aea:aecrev:v:99:y:2009:i:5:p:2129-34
    Note: DOI: 10.1257/aer.99.5.2129
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2129
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-815, August.
    2. Asch, Peter & Malkiel, Burton G. & Quandt, Richard E., 1982. "Racetrack betting and informed behavior," Journal of Financial Economics, Elsevier, vol. 10(2), pages 187-194, July.
    3. Hurley, William & McDonough, Lawrence, 1995. "A Note on the Hayek Hypothesis and the Favorite-Longshot Bias in Parimutuel Betting," American Economic Review, American Economic Association, vol. 85(4), pages 949-955, September.
    4. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
    5. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-174, Spring.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bryan C. McCannon, 2015. "Replacement Referees And Nfl Betting Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 9(2), pages 14-26.
    2. Filiz-Ozbay, Emel & Guryan, Jonathan & Hyndman, Kyle & Kearney, Melissa & Ozbay, Erkut Y., 2015. "Do lottery payments induce savings behavior? Evidence from the lab," Journal of Public Economics, Elsevier, vol. 126(C), pages 1-24.
    3. Gustav Axén & Dominic Cortis, 2020. "Hedging on Betting Markets," Risks, MDPI, vol. 8(3), pages 1-14, August.
    4. Hans Peter Grüner & Christoph Siemroth, 2019. "Crowdfunding, Efficiency, and Inequality," Journal of the European Economic Association, European Economic Association, vol. 17(5), pages 1393-1427.
    5. Marco Ottaviani & Peter Norman Sørensen, 2015. "Price Reaction to Information with Heterogeneous Beliefs and Wealth Effects: Underreaction, Momentum, and Reversal," American Economic Review, American Economic Association, vol. 105(1), pages 1-34, January.
    6. Siemroth, Christoph, 2014. "Why prediction markets work : The role of information acquisition and endogenous weighting," Working Papers 14-02, University of Mannheim, Department of Economics.
    7. Feess, Eberhard & Müller, Helge & Schumacher, Christoph, 2016. "Estimating risk preferences of bettors with different bet sizes," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1102-1112.
    8. Leighton Vaughan Williams & Ming‐Chien Sung & Peter A. F. Fraser‐Mackenzie & John Peirson & Johnnie E. V. Johnson, 2018. "Towards an Understanding of the Origins of the Favourite–Longshot Bias: Evidence from Online Poker Markets, a Real‐money Natural Laboratory," Economica, London School of Economics and Political Science, vol. 85(338), pages 360-382, April.
    9. Marco Ottaviani & Peter Norman Sorensen, 2010. "Noise, Information, and the Favorite-Longshot Bias in Parimutuel Predictions," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 58-85, February.
    10. Karl Whelan, 2024. "Risk aversion and favourite–longshot bias in a competitive fixed‐odds betting market," Economica, London School of Economics and Political Science, vol. 91(361), pages 188-209, January.
    11. Charles Moul & Joseph Keller, 2014. "Time to Unbridle U.S. Thoroughbred Racetracks? Lessons from Australian Bookies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(3), pages 211-239, May.
    12. Lionel Page & Robert T. Clemen, 2013. "Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?-super-," Economic Journal, Royal Economic Society, vol. 123(568), pages 491-513, May.
    13. Lambert, Nicolas S. & Langford, John & Wortman Vaughan, Jennifer & Chen, Yiling & Reeves, Daniel M. & Shoham, Yoav & Pennock, David M., 2015. "An axiomatic characterization of wagering mechanisms," Journal of Economic Theory, Elsevier, vol. 156(C), pages 389-416.
    14. Suhonen, Niko & Saastamoinen, Jani & Kainulainen, Tuomo & Forrest, David, 2018. "Is timing everything in horse betting? Bet amount, timing and bettors’ returns in pari-mutuel wagering markets," Economics Letters, Elsevier, vol. 173(C), pages 97-99.
    15. Juan Vidal-Puga, 2017. "On the effect of taxation in the online sports betting market," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 8(2), pages 145-175, June.
    16. Erhan Bayraktar & Alexander Munk, 2016. "High-Roller Impact: A Large Generalized Game Model of Parimutuel Wagering," Papers 1605.03653, arXiv.org, revised Mar 2017.
    17. Joachim R. Groeger, 2016. "The Informational Content of the Limit Order Book: An Empirical Study of Prediction Markets," Papers 1609.03471, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Russell Sobel & S. Travis Raines, 2003. "An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting," Applied Economics, Taylor & Francis Journals, vol. 35(4), pages 371-385.
    2. Ottaviani, Marco & Sørensen, Peter Norman, 2003. "Late Informed Betting and the Favourite-Longshot Bias," CEPR Discussion Papers 4092, C.E.P.R. Discussion Papers.
    3. John Peirson & Michael A. Smith, 2010. "Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior," Southern Economic Journal, John Wiley & Sons, vol. 76(4), pages 976-992, April.
    4. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions?," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 723-746, August.
    5. Philip W. S. Newall & Dominic Cortis, 2021. "Are Sports Bettors Biased toward Longshots, Favorites, or Both? A Literature Review," Risks, MDPI, vol. 9(1), pages 1-9, January.
    6. Hegarty, Tadgh & Whelan, Karl, 2023. "Disagreement and Market Structure in Betting Markets: Theory and Evidence from European Soccer," CEPR Discussion Papers 18144, C.E.P.R. Discussion Papers.
    7. Jinook Jeong & Jee Young Kim & Yoon Jae Ro, 2019. "On the efficiency of racetrack betting market: a new test for the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 51(54), pages 5817-5828, November.
    8. Marshall Gramm & Douglas H. Owens, 2006. "Efficiency in Pari‐Mutuel Betting Markets across Wagering Pools in the Simulcast Era," Southern Economic Journal, John Wiley & Sons, vol. 72(4), pages 926-937, April.
    9. Montone, Maurizio, 2021. "Optimal pricing in the online betting market," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 344-363.
    10. Zhang, Chi & Thijssen, Jacco, 2022. "On sticky bookmaking as a learning device in horse-racing betting markets," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    11. Kajii, Atsushi & Watanabe, Takahiro, 2017. "Favorite–longshot bias in pari-mutuel betting: An evolutionary explanation," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 56-69.
    12. Martin Kukuk & Stefan Winter, 2008. "An Alternative Explanation of the Favorite-Longshot Bias," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 2(2), pages 79-96, September.
    13. Bergemann, Dirk & Ottaviani, Marco, 2021. "Information Markets and Nonmarkets," CEPR Discussion Papers 16459, C.E.P.R. Discussion Papers.
    14. Maschke Mario & Schmidt Ulrich, 2011. "Das Wettmonopol in Deutschland: Status quo und Reformansätze," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 60(1), pages 110-124, April.
    15. W. David Walls & Kelly Busche, 2003. "Broken odds and the favourite-longshot bias in parimutuel betting: a direct test," Applied Economics Letters, Taylor & Francis Journals, vol. 10(5), pages 311-314, April.
    16. Jaiho Chung & Joon Ho Hwang, 2010. "An Empirical Examination of the Parimutuel Sports Lottery Market versus the Bookmaker Market," Southern Economic Journal, John Wiley & Sons, vol. 76(4), pages 884-905, April.
    17. Karl Whelan, 2024. "Risk aversion and favourite–longshot bias in a competitive fixed‐odds betting market," Economica, London School of Economics and Political Science, vol. 91(361), pages 188-209, January.
    18. Norton, Hugh & Gray, Steve & Faff, Robert, 2015. "Yes, one-day international cricket ‘in-play’ trading strategies can be profitable!," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 164-176.
    19. Marco Ottaviani & Peter Norman Sorensen, 2010. "Noise, Information, and the Favorite-Longshot Bias in Parimutuel Predictions," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 58-85, February.
    20. M. Sung & J. E. V. Johnson, 2010. "Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies," Economica, London School of Economics and Political Science, vol. 77(305), pages 128-147, January.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:99:y:2009:i:5:p:2129-34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.