Investigating the roots of favourite-longshot bias: an analysis of decision-making by supply and demand-side agents in parallel betting markets

This paper offers new insights into the behavioural origins of the favourite-longshot bias - an established feature of betting markets, whereby longshots win less often than the subjective probabilities imply and favourites more often. A number of alternative explanations has been offered for this phenomenon but the main debate focuses on whether it is caused by the behaviour of those supplying betting markets (bookmakers) or of the demand-side agents in these markets (bettors) . This study analyses a new data source which offers detailed information for a large sample of recent UK horseraces on decision-making behaviour within the parimutuel and the parallel bookmaker-based betting markets. The results offer strong evidence for the existence of the favourite-longshot bias in bookmaker-based markets, with a corresponding absence of such an effect in the parimutuel case. These results offer support for the view that the origins of the favourite-longshot bias lie principally in the decisions of bookmakers rather than in the decisions of bettors.