The Favorite-Longshot Bias in Sequential Parimutuel Betting with Non-Expected Utility Players

Theory and Decision 54 (3):231-248 (2003)

Abstract
This paper analyzes a model of sequential parimutuel betting described as a two-horse race with a finite number of noise bettors and a finite number of strategic and symmetrically informed bettors. For generic objective probabilities that the favorite wins the race, a unique subgame perfect equilibrium is characterized. Additionally, two explanations for the favorite–longshot bias—according to which favorites win more often than the market's estimate of their winning chances imply—are offered. It is shown that this robust anomalous empirical regularity might be due to the presence of transaction costs and/or to strategic bettors' subjective attitude to probabilities
Keywords Favorite–longshot bias  Non-expected utility under risk  Parimutuel betting  Sequential decisions
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DOI 10.1023/A:1027387507335
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