DP4092 Late Informed Betting and the Favourite-Longshot Bias

Author(s): Marco Ottaviani, Peter Norman Sørensen
Publication Date: October 2003
Keyword(s): favourite-longshot bias, parimutuel betting, private information, timing
JEL(s): D43, D82, D84, G13, L83
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4092

According to the favorite-longshot bias observed in pari-mutuel 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.