Research on horse racing betting markets has revealed a persistent favorite-longshot bias, where favorites are underbet and longshots are overbet, with studies suggesting that bettors often exhibit risk-loving behavior or misperceptions of probabilities in these markets (Asch et al., 1984; Sobel & Travis Raines, 2003; Snowberg & Wolfers, 2007). This bias tends to lead to inefficiencies in win betting markets, as longshots are overvalued and favorites are undervalued. The tendency for bettors to overestimate the chances of a longshot winning while underestimating the chances of a favorite contributes to these market inefficiencies. However, some studies indicate that there may still be opportunities for profitable betting in place and show betting markets, as these markets may be less affected by the favorite-longshot bias (Hausch et al., 1981; Quandt, 1986).
Market efficiency tends to improve as betting volumes increase, with higher betting volumes helping to correct some of the biases present in the market (Gramm & Rhodes College, 2005). Despite these inefficiencies, the betting market overall is still considered largely efficient, as subjective and objective probabilities in these markets are often similar (Quandt, 1986). In this context, the complexity of bets and the information available to bettors may also play a significant role in influencing the degree to which the bias is observed, as more experienced bettors or those with access to better information may navigate the complexities of the betting markets more effectively (Sobel & Travis Raines, 2003). These findings provide valuable insights into the decision-making processes of bettors and illustrate how cognitive biases, such as the favorite-longshot bias, can impact market behavior in the face of uncertainty.
Some studies indicate that there may still be opportunities for profitable betting in place and show betting markets, as these markets may be less affected by the favorite-longshot bias
Summary of: Hausch Et al 1981 and Quandt 1986
Anecdote
Have a story to share? Write to us at research@bettingresearch.org if you have a related, personal experience you would like to see placed here and share with the community.
Articles Cited
- “P. Asch, B. Malkiel, R. Quandt (1984): Market Efficiency in Racetrack Betting, https://doi.org/10.1086/296257
- The paper examines the efficiency of the racetrack betting market and whether profitable betting strategies can be devised based on observed betting patterns, finding that while such strategies may exist, they may not be exploitable on a substantial scale, and that the betting market does not necessarily exhibit irrational behavior.”
- “D. Hausch, W. Ziemba, M. Rubinstein. (1981): Efficiency of the Market for Racetrack Betting, https://doi.org/10.1287/MNSC.27.12.1435
- The authors describe a technical betting system for place and show bets at racetracks that can produce substantial positive profits, demonstrating market inefficiency in a weak form sense.”
- “R. Sobel, S. Travis Raines (2003): An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting, https://doi.org/10.1080/00036840110111176
- The paper examines two theoretical explanations for the favorite-longshot bias in racetrack betting, finding that an information-based model better explains the data than the risk preference model.”
- “- (1986): Searching for positive returns at the track: a multinomial logic model for handicapping horse races, https://doi.org/10.1287/MNSC.32.8.1040
- The paper develops and applies a multinomial logit model to handicapping horse races in order to identify investment strategies that can generate positive expected returns in the pari-mutuel betting system, even with the typically large track take.”
- “J. Golec, M. Tamarkin (1998): Bettors Love Skewness, Not Risk, at the Horse Track, https://doi.org/10.1086/250007
- Bettors at horse races prefer high-variance, low-probability bets (long shots) not because they are risk-loving, but because they are attracted to the skewness of the bet returns, which is highly correlated with the variance.”
- “E. Snowberg, J. Wolfers (2007): Explaining the Favorite-Longshot Bias : Is it Risk-Love or Misperceptions ? ∗, –
- The paper provides novel empirical tests to discriminate between the neoclassical and behavioral explanations for the favorite-longshot bias, finding evidence that the bias is driven by misperceptions of probability rather than risk-love.”
- “Marshall K. Gramm, Rhodes College (2005): BETTING MARKET EFFICIENCY AT PREMIERE RACETRACKS, –
- This paper empirically analyzes the favorite-longshot bias in betting markets at the two largest U.S. racetracks, Saratoga and Del Mar, finding that while inefficiencies exist, they are reduced as betting volume increases.”
- “R. Quandt (1986): Betting and Equilibrium, https://doi.org/10.2307/1884650
- Racetrack betting is a simple investment situation where individuals invest money for uncertain returns, and the paper discusses various aspects of this, including the relationship between objective and subjective probabilities of winning, risk-loving behavior among bettors, and the efficiency of the betting market.”
Insufficient Detail?
At times it is difficult to answer the question as there are not enough relevant published journal articles to relate. It could be that the topic is niche, there’s a significant edge (and researchers prefer not to publish), there is no edge or simply no one has thought to investigate.
