An examination of the determinants of biased behaviour in a market for state contingent claims

Description/Abstract

We develop a model to explain the differential incidence of the favourite-longshot bias in parallel sectors of the pari-mutuel horserace betting market. Hypotheses are derived from the model and these are tested, using UK data, to explore the origins of the bias. Significant variations in the bias are discovered between market sectors on- and off-racetrack. These results shed light on competing demand-side explanations for the favourite-longshot bias and suggest that it is affected by a combination of behavioural and operational features of the markets and the types of bettors (informed and leisure) which they attract.