Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias

Stefan Winter and Martin Kukuk

Applied Economics, 2008, vol. 40, issue 1, 75-87

Abstract: One of the most striking empirical patterns of horse race betting markets is the favourite-longshot bias: Bets on favourites have dramatically higher expected returns than bets on longshots. The literature offers a couple of different, though not mutually exclusive, explanations based on risk preferences and probability perceptions. This article adds a new possible explanation: The favourite-longshot bias may be the rational answer of an honest audience to a simple, but highly lucrative cheating opportunity of insiders. We provide anecdotal evidence that the type of cheating we model here really takes place. What is more, by employing a large scale German data set we are able to demonstrate that the pattern of the favourite-longshot bias changes as the opportunity of cheating vanishes. The changes we observe are in accord with the cheating model we suggest.

Date: 2008
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DOI: 10.1080/00036840701731538

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