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American Economic Review: Vol. 99 No. 5 (December 2009)

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Surprised by the Parimutuel Odds?

Article Citation

Ottaviani, Marco, and Peter Norman Sørensen. 2009. "Surprised by the Parimutuel Odds?" American Economic Review, 99(5): 2129-34.

DOI: 10.1257/aer.99.5.2129

Abstract

Empirical analyses of parimutuel betting markets have documented that market probabilities of favorites (longshots) tend to underestimate (overestimate) the corresponding empirical probabilities. We argue that this favorite-longshot bias is consistent with bettors taking simultaneous positions on the basis of private information about the likelihood of different outcomes. The ex post realization of a high market probability indicates favorable information about the occurrence of an outcome -- and the opposite is true for longshots. This explanation for the bias relies on the bettors' inability to incorporate the surprise revealed by the final odds. (JEL D81, D82, L83)

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Authors

Ottaviani, Marco (Northwestern U)
Sørensen, Peter Norman (U Copenhagen)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty
D82: Asymmetric and Private Information
L83: Sports; Gambling; Recreation; Tourism


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