Working Paper BETA #2002-12

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Title : The Favorite-Longshot Bias in Sequential parimutuel Betting with Non-Expected Utility Players

Author(s) : Frédéric KOESSLER, Anthony ZIEGELMEYER, Marie-Hélè

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.

Key-words : Parimutuel betting; Sequential decisions; Favorite-longshot bias; Non-expected utility under risk.

JEL Classification : C72; D81.