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
Citation
KAJII, Atsushi and WATANABE, Takahiro.
Favorite–longshot bias in pari-mutuel betting: An evolutionary explanation. (2017). Journal of Economic Behavior and Organization. 140, 56-69. Research Collection School Of Economics.
Available at: https://ink.library.smu.edu.sg/soe_research/2082
Creative Commons 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