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

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Winter, Stefan; Kukuk, Martin

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Abstract One of the most striking empirical patterns of horse race betting markets is the favorite-longshot bias: Bets on favorites 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 favorite-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.
Classification Economic Statistics, Econometrics, Business Informatics
Free Keywords Pferdesport; Glücksspiel; Bias; Schätzung
Document language English
Publication Year 2008
Page/Pages p. 75-87
Journal Applied Economics, 40 (2008) 1
Status Postprint; reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)