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,
"Noise, Information, and the Favorite-Longshot Bias in Parimutuel Predictions."
American Economic Journal: Microeconomics,
Criteria for Decision-Making under Risk and Uncertainty
Search; Learning; Information and Knowledge; Communication; Belief