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American Economic Journal: Microeconomics: Vol. 2 No. 1 (February 2010)

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Noise, Information, and the Favorite-Longshot Bias in Parimutuel Predictions

Article Citation

Ottaviani, Marco, and Peter Norman Sorensen. 2010. "Noise, Information, and the Favorite-Longshot Bias in Parimutuel Predictions." American Economic Journal: Microeconomics, 2(1): 58-85.

DOI: 10.1257/mic.2.1.58

Abstract

According to the favorite-longshot bias, the expected return on an outcome tends to increase in the fraction of bets laid on that outcome. We derive testable implications for the direction and extent of the bias depending on the ratio of private information to noise present in the market. We link this ratio to observables such as the number of bettors, the number of outcomes, the amount of private information, the level of participation generated by recreational interest in the event, the divisibility of bets, the presence of ex post noise, as well as ex ante asymmetries across outcomes. (JEL D81, D83)

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Authors

Ottaviani, Marco (London Business School and Northwestern U)
Sorensen, Peter Norman (U Copenhagen)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief

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