Market efficiency dictates it equally profitable to bet on any racing participant, including the favourite or longshot. However, a well-documented anomaly is that racetrack bettors tend to overbet longshots and underbet favourites. This study presents and tests two theoretical explanations for this favourite-longshot bias. The unparalleled richness of the data allows the exploration of how the bias changes with several key variables. This study finds the most popular current explanation for the bias, the risk preference model, cannot explain the data as well as an information-based model, in which the bias depends on bet complexity and the information possessed by bettors.
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Document Type: Research Article
Department of Economics, PO Box 6025, West Virginia University, Morgantown, WV 26506, USA
Department of Economics, CB #3305 University of North Carolina-Chapel Hill, Chapel Hill, NC 27599, USA
Publication date: 2003-01-01
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