THE IMPLICATIONS OF A REVERSE FAVOURITE-LONGSHOT BIAS IN A PREDICTION MARKET

Richard Borghesi

Journal of Prediction Markets, 2012, vol. 6, issue 2, 12-21

Abstract: We examine 330,857 trades of prediction market contracts, the values of which are based on against-the-spread outcomes of NFL games, and find the presence of a significant reverse favourite-longshot bias. Surprisingly, the timing of this bias is identical to that observed in traditional casino-style NFL betting markets. That is, late-season away favourites so profoundly underperform expectations that the set of all favourites underperforms on average. Prior research shows that in prediction markets having asset prices ranging from $0 to $100, win rates are below (above) expectations when prices are low (high). However, we show that observed win rates for contracts on late-season away favourites are below expectations across all prices. The presence of a strong RFL bias in a prediction market provides evidence against the theories that this bias is caused by line shading or due to the effects of unpredicted weather variables on team performance.

JEL-codes: L83 (search for similar items in EconPapers)
Date: 2012
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