Publication Type

Journal Article

Publication Date

8-2017

Abstract

Favorite–longshot bias (FLB) refers to an observed tendency whereby “longshots” are overvalued and favorites are undervalued. We offer an evolutionary explanation for FLB in pari-mutuel betting using a simple market model. A bettor is forced to quit with some probability if his total net gain in one day is negative. Because of a positive track take, the expected returns of any strategy are negative, and so every agent must eventually lose and disappear in the long run. Those who favor longshots have a better chance of getting ahead with rare but large gains, enabling them to survive for longer than those who bet on favorites. This relative advantage results in overvaluation of longshots in the long run.

Keywords

Favorite–longshot bias, Market selection, Competitive evolutionary market, Profit maximization, Risk loving

Discipline

Economics | Economic Theory

Research Areas

Economic Theory

Publication

Journal of Economic Behavior and Organization

Volume

140

First Page

56

Last Page

69

ISSN

0167-2681

Identifier

10.1016/j.jebo.2017.05.001

Publisher

Elsevier

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

https://doi.org/10.1016/j.jebo.2017.05.001

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