Finance:Favourite-longshot bias
In gambling and economics, the favourite-longshot bias is an observed phenomenon where on average, bettors tend to overvalue "longshots" and relatively undervalue favourites. That is, in a horse race where one horse is given odds of 2-to-1, and another 100-to-1, the true odds might for example be 1.5-to-1 and 300-to-1 respectively. Betting on the "longshot" is therefore a much worse proposition than betting on the favourite. In the long run, losing 5% by betting on the favourite, but losing 40% on longshots is not uncommon. The phenomenon was first discovered by Griffith.[1] Various theories exist to explain why people willingly bet on such losing propositions, such as risk-loving behavior, risk-averse behavior[2] or simply inaccurate estimation as presented by Sobel and Raines.[3]
Methods such as the goto_conversion,[4] Power[5] and Shin[6] can be used to measure the bias by converting betting odds to true probabilities.
See also
- Rank-dependent expected utility
References
- ↑ https://daily.jstor.org/betting-on-the-longshot/
- ↑ "We discount the chances of any party at 100/1 or bigger. The reverse of tweak 1 applies here. Almost all of these probably have effectively zero chance. Why don’t we just make them a bigger price? We don’t think we’ll take much extra money, certainly not enough to compensate us for the day we get it wrong." Matthew Shadwick, Ladbrokes, 2010-02-25. See Ladbrokes Election Forecast Feb 25th 2010
- ↑ Russell S. Sobel & S. Travis Raines, 2003. "An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting," Applied Economics, Taylor and Francis Journals, vol. 35(4), pages 371-385, January
- ↑ Convert Betting Odds to Probabilities More Accurately and Efficiently than Shin and Power Methods[1]
- ↑ Adjusting Bookmaker’s Odds to Allow for Overround[2]
- ↑ On determining probability forecasts from betting odds[3]
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