The Favourite‐Longshot Bias, Bookmaker Margins and Insider Trading in a Variety of Betting Markets

This paper verifies the existence of the favourite‐longshot bias in a variety of sports betting markets where odds are set by bookmakers, but the precise pattern of the bias is not identical. Evidence is found to support a central prediction of the Shin (1993) model, which asserts that bookmakers are impelled to create a bias in their odds because of the presence of insider traders: that margins increase with the number of competitors.     

Searching for the favourite-longshot bias down under: an examination of the New Zealand pari-mutuel betting market

This paper tests for the presence of the favourite-longshot bias in a new setting. This bias #150 the tendency for bettors to underbet favourites and overbet longshots #150 has been found in most studies of pari-mutuel and bookmaking betting markets in the USA, the UK and Australia. However, there is growing evidence that in at least some pari-mutuel betting markets there is no favourite-longshot bias. This paper examines the previously unexplored New Zealand pari-mutuel betting market on horse races for evidence of this bias. Utilizing a large sample of recent New Zealand thoroughbred horse races, it is found that while early, off-track bettors price this bias into odds, late (on-and off-track) bettors eliminate much of the bias by the close of betting. That is, the results reinforce the view that not all pari-mutuel betting markets are characterized by a favourite-longshot bias at the close of betting. Evidence is also found that late bettors in this market are smart bettors.     

OPTIMAL PRICE SETTING IN FIXED‐ODDS BETTING MARKETS UNDER INFORMATION UNCERTAINTY

This paper develops a model of optimal pricing under information uncertainty for fixed‐odds betting markets. The model suggests that bookmakers require a premium for quoting the odds several days before an event. This premium reflects the uncertainty of public information that can be exploited by expert bettors. The model predicts that when bookmakers set optimal prices, expected returns to bettors increase as a monotonic function of winning probabilities. In this manner, an information‐based explanation is given for the celebrated favourite‐longshot bias in fixed‐odds. Using an extensive data‐set of football odds from two major European bookmakers, we estimate the probability of informed betting.     

On the efficiency of racetrack betting market: a new test for the favourite-longshot bias

A number of empirical studies on the efficiency of racetrack betting market have shown the ‘favourite-longshot bias,’ which means longshots are overbet while favourites are underbet. Asian markets such as Hong Kong and Japan, however, have produced some contradictory empirical evidence to the bias. One critical element in the efficiency test procedure is how to assess the unobservable objective winning probability of a horse in a race. This paper proposes a new test framework with a more general evaluation of the objective probability of winning than the traditional method. Unlike the traditional method, our model allows the heterogeneity of the horses and the races. We apply the new empirical method to test whether the favourite-longshot bias is present in racetrack betting market of Korea. We found that the favourite-longshot bias exists in the racetrack market of Korea and the result distinguishes Korean racetrack market from other Asian markets.     

Game,set and match: the favourite-long shot bias in tennis betting exchanges

We test for the existence of Favourite-Longshot Bias (FLB) in tennis betting exchanges. Despite these being order-driven markets, with no direct participation from bookmakers, we have found very similar results to those obtained by Lahvi?ka (2014) for bookmakers’ betting markets: the bias is stronger in matches between lower-ranked players, in later round matches and in high profile tournaments. This suggests that bookmakers’ adjustments to respond to informed betting are not the main driver of FLB. The varying magnitude of the bias across different types of event in the main market also weakens arguments linking FLB to gamblers’ risk preferences, and suggests the need to consider the microstructure features of the market together with the cognitive biases highlighted in the behavioural finance literature.     

To bet or not to bet: a reality check for tennis betting market efficiency

We present evidence that the tennis betting market appears to be much more efficient than suggested by previous studies. More specifically, we study the market efficiency by studying the forecasting performance of a diversified set of 40 betting rules in two ways: by searching for the existence of a return differential between betting rules and by analysing the profitability of betting rules. Even though individual tests provide evidence that, within our universe of betting rules, positive returns can be achieved, when data-snooping bias is taken into account, the evidence diminishes. Subsequently, we also find very little evidence of return differentials between betting rules. These results cast doubts on previous research as they suggest that when the potential detrimental effects of data-dreading are taken into account, betting markets in general might not, ultimately, be so inefficient.     

Why are some favourite-longshot biases positive and others negative?

Most studies of both pari-mutuel and fixed-odds betting markets have shown a systematic tendency for the expected return to bets at lower odds to exceed those at higher odds. Some work, however, has revealed in certain markets the absence or even reversal of this bias. We present a model which distinguishes two separate types of bettor, and use this to demonstrate how transactions costs, the extent of public information, and consumption benefits of betting can explain the disparities. Our empirical evidence, taken from a fixed-odds market, lends support to our theoretical conclusions.     

Information Efficiency in Betting Markets: a Survey

The concept of information efficiency is central to many studies of financial markets, and these studies have been well surveyed to date. A betting market is an example of a simple financial market, but one which offers researchers the added advantage that it is characterized by a well-defined termination point at which each asset (or bet) possesses a definite value. In consequence, it is much more convenient to use this particular context to formulate tests of information efficiency, and from these tests to draw useful conclusions. This paper surveys the rapidly growing literature which has to date addressed this issue of information efficiency in betting markets.     

The Favourite-Longshot Bias and Market Efficiency in UK Football betting

It is shown that the individual fixed-odds betting market on UK football exhibits the same favourite-longshot bias as that found in horse-racing. The bias appears both in betting on results (home win, away win or draw) and in betting on specific scores, and there are certain trading rules which appear to be profitable. Poisson and Negative Binomial regressions are carried out to estimate the mean number of goals scored by a team in a match with given market odds for the various outcomes. Tables of odds for individual scores are derived and these appear to fit the actual outcomes far better than those of the bookmaker.     

New light on the longshot bias

The longshot bias is the tendency for bettors to put more money on horses with long odds than is justified by their objective probability of winning: thus favourites win more often than projected by their odds. This challenges normative assumptions as it means the return increases with the probability of winning. Even though the longshot bias is well-known, it has defied authoritative explanation. This article draws on studies of the longshot bias over 50 years across four continents to show that its nature is consistent with two bettor populations. One is risk-averse, knowledgeable about winners, backs favourites, believes in the gambler's fallacy, and has a positive expected return. The other, a larger group is risk loving, backs longshots, believes in hot hands, and has a significant, negative expected return. The crossover between the two groups occurs where the probability of a positive result is about 0.2. This matches the transition from risk aversion to risk embrace which has been found in a variety of behavioural studies.     

Recreational versus professional bettors: Performance differences and efficiency implications

Using a novel dataset, which allows comparisons across heterogeneous sub-groups of pari-mutuel bettors, we demonstrate significant behaviour and performance distinctions between recreational and professional investors. Professionals’ ability to earn abnormal returns on short odds horses in high volume markets challenges the existing empirical consensus, which offers very limited evidence of betting market inefficiency. The results offer important lessons for betting operators and regulators and highlight the potential for similar avenues of investigation in other speculative markets.     

DO GAMBLERS THINK THAT TEAMS TANK? EVIDENCE FROM THE NBA

A growing body of literature indicates that sports teams face incentives to lose games at the end of the season. This incentive arises from a league's entry draft policy. We use data from betting markets to confirm the existence of tanking, or the perception of tanking, in the National Basketball Association (NBA). Results from a Seemingly Unrelated Regression (SUR) model of point spreads and point differences in NBA games indicate that betting markets believe that tanking takes place in the NBA, even though the evidence that tanking actually exists is mixed. Other NBA policy changes also affect betting market outcomes. (JEL D0, L0)     

Testing for rational expectations in the UK National Lottery

The concept of rational expectations has typically been assumed, without testing, in the analysis of consumer demand and market efficiency in betting markets, including betting on lottery games. Lottery games offer an excellent opportunity to test how participants process the information that is available to them. Using the UK National Lottery as our particular case, we find that participants, in general, efficiently process available information. Specifically, they act as if they can, on average, forecast the level of sales for a given drawing.     

Foreign aid and economic growth in Cameroon

A recent study of the fixed-odds betting market on baseball games, while finding that the betting market is generally efficient, also found evidence of an underbetting on underdog teams. This article examines the evidence for this new anomaly. It corrects Woodland and Woodland's estimates of the commission, subjective win probabilities and test statistics. The efficiency null hypothesis cannot be rejected for all of their tests when revised test statistics are calculated for their sample period (however, like them, it was found that slight underdogs are underbet). It is also shown that their bias is not simply a bias involving favourites and underdogs. Whether underdogs are playing at home or away also seems to matter in their sample period. As well a positive relationship between returns and subjective probabilities was found for underdogs and favourites, a relationship suggestive of a favourite-longshot bias rather than its reverse. It is concluded that there is insufficient evidence to claim that this bias is a ‘true market inefficiency’.     

The empirical effects of competition on third‐degree price discrimination in the presence of arbitrage

Since Borenstein ( 1985 ) and Holmes ( 1989 ), a theoretical and empirical literature has emerged that examines the effects of competition on third‐degree price discrimination. Since transaction costs involved in conducting arbitrage are typically unobserved, empirical investigations in this area have largely been restricted to markets such as for air travel where arbitrage is difficult, if not impossible. Using an entirely novel dataset, this paper documents the effect of competition on price discrimination in the presence of arbitrage in the Canadian online sports betting market where prices for Canadian teams are higher than in the world market. I observe how the prices of Canadian teams change in real time in response to the presence of arbitrageurs that establish Canadian sportsbooks’ observable marginal opportunity costs. I exploit the existence of government betting outlets not subject to arbitrage to obtain reduced form counterfactual estimates of the extent to which competition affects price discrimination in the presence of arbitrage. In this new empirical environment, I find results consistent with the airline literature: competition reduces overall price dispersion and markups, but dispersion and markups shrink more for those in the “strong” market than the “weak” market.     

Regulating Insider Trading In Betting Markets

Although trading in securities in conventional financial markets on the basis of inside information is restricted by law, the rules against such trading in betting markets are rather more ambiguous. It is argued in this paper that, since insider trading in betting markets imposes a cost on the great majority of bettors, tighter strictures against such trading would benefit all but the insiders. This case is supported by the use of empirical evidence which shows that betting markets which are characterized by tighter controls against insider activity are also characterized by a significantly lower incidence of such activity.     

Betting market inefficiencies are short-lived in German professional football

In this article, we argue that potential inefficiencies on betting markets are more likely to exist at the very beginning of a season, when the available information on the teams’ playing strength is difficult to evaluate. This lack of reliable information should be particularly large in the case of recently promoted teams that have typically undergone major changes in the composition of their roster following their promotion. Without any information on the latter teams’ potential performance, they are particularly difficult to evaluate, which may eventually lead to inefficiencies and positive returns on investment in the betting market. We analyse odds from German first division Bundesliga soccer for the seasons from 2002/03 to 2015/16 to find betting market inefficiencies at the start of the season. As expected, betting on recently promoted team wins generates temporarily positive returns, especially for away games. These results suggest bookmakers to underestimate promoted teams’ ability to familiarize with the conditions in the new league, such as having to play in front of larger, often hostile crowds.     

Market efficiency and continuous information arrival: evidence from prediction markets

Two regularities in financial economics are that prices underreact to news events and that they display short term momentum. This article tests for the presence of these regularities in prediction markets offered by the betting exchange Betfair on the 2008 Ryder Cup Golf Competition. Betfair offered in play prediction markets on the individual match play pairings and on the Cup result, with trading being virtually continuous in all markets. Modelled probabilities of the Cup result were updated continuously using trades in the individual match play pairings. These probabilities were then compared with the probabilities of the Cup result implied by odds in that market. The odds in the market for the Cup result underreact to both good and bad news that is provided by changes in the odds in the markets for the individual pairings. Further, these modelled probabilities Granger cause changes in the probabilities of the Cup result implied by odds in the market on that outcome. In addition, economically and statistically significant evidence of momentum is found in the odds in the market on the Cup result.     

Is there an optimistic bias on betting markets?

Bettors are subject to an optimistic bias when betting on the team they support. This paper shows that this individual bias does not affect betting odds on British teams in association football (soccer), as it is often argued.     

The ordinal efficiency of betting markets: an exploded logit approach

This article offers a new perspective on efficiency in betting markets by examining the degree to which finishing order in horse races corresponds to probabilities inherent in odds across different categories of horse race. The application of an exploded logit procedure reveals a significantly greater degree of ordinal efficiency in higher relative to lower-class races. Explanations for the phenomenon include differences in prize-related incentives, cross-market distinctions in information markets and differential opportunity/incentive for market manipulation.