The Favorite-Longshot Bias in Sequential Parimutuel Betting with Non-Expected Utility Players

This paper analyzes a model of sequential parimutuel betting described as a two-horse race with a finite number of noise bettors and a finite number of strategic and symmetrically informed bettors. For generic objective probabilities that the favorite wins the race, a unique subgame perfect equilibrium is characterized. Additionally, two explanations for the favorite–longshot bias—according to which favorites win more often than the market's estimate of their winning chances imply—are offered. It is shown that this robust anomalous empirical regularity might be due to the presence of transaction costs and/or to strategic bettors' subjective attitude to probabilities.     

Efficiency of Betting Markets and Rationality of Players: Evidence from the French 6/49 Lotto

We analyse the existence of preferred numbers on the French Lotto market and prove that this market is not strongly efficient in the sense of Thaler & Ziemba (1988). The preference for low numbers is investigated by means of stochastic dominance tests. The specific features of the French Lotto game allow us to build a simple estimate of the probability distribution of numbers actually played. The results are compared with the (highly time-consuming) maximum likelihood estimator used by Farrell et al. (2000). It is shown that the two methods give very close results. Our conclusions stress the perspectives of this study in various domains.     

Sequential Parimutuel Betting in the Laboratory

This paper investigates parimutuel betting in the laboratory. Our experimental design relies on a simple sequential betting game where equilibrium strategies are characterized according to objective probabilities, the number of bettors, and publicly observable odds. The empirically well-documented phenomenon referred to as the favorite-longshot bias is observed in two of our three treatments. We offer a theoretical explanation of the subjects' behavior which relies on rank-dependent expected utility and pessimistic expectations about future bets.