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

Marco Ottaviani | Zendy; Peter Norman Sørensen | Zendy

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

Author(s) -

Marco Ottaviani,

Peter Norman Sørensen

Publication year - 2010

Publication title -

american economic journal microeconomics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 5.339

H-Index - 40

eISSN - 1945-7685

pISSN - 1945-7669

DOI - 10.1257/mic.2.1.58

Subject(s) - outcome (game theory) , econometrics , noise (video) , economics , event (particle physics) , ex ante , private information retrieval , fraction (chemistry) , recreation , mathematics , statistics , microeconomics , computer science , physics , artificial intelligence , quantum mechanics , chemistry , organic chemistry , image (mathematics) , macroeconomics , political science , law

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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