The efficiency of exotic wagers in racetrack betting

Abstract

Many empirical studies have found the existence of a bias where the general public overestimates low probability events. This phenomenon has been termed the favourite-longshot bias and has been much studied in betting markets. This article looks at efficiency in multihorse 'exotic' wagers using 11 194 races run at 35 U.S. racetracks. We find the standard favourite-longshot in exacta wagers (involves picking the first two finishers in order). Results are unclear for trifecta wagers (picking the first three finishers in order).

Market In efficiency in Person‐to‐Person Betting: Examining ‘Known Loser’ Insider Trading on the Exchanges

“…8 They may do so in order to pass the costs arising from insider activity on to outsiders; that is, recreational bettors who, according to popular explanations of the favorite-longshot bias, over-bet longshots and under-bet on favorites (Smith, Paton, and Vaughan Williams 2006) because they are risk loving (Rosett 1965) and/or because transaction and information costs restrict bettors' ability to calculate horses' ''true'' winning probabilities (Hurley and McDonough 1995). 9 The favorite-longshot bias is empirically well established (see, for example, Henery 1985; Thaler and Ziemba 1988;Vaughan Williams and Paton 1997;Bruce and Johnson 2000b), and the phenomenon continues to attract the attention of researchers (see, for example, Gramm, McKinney, and Owens 2008;Winter and Kukuk 2008). In a recent study, Smith, Paton, and Vaughan Williams (2006) apply the Shin z measure to betting exchange data and report a significantly lower favorite-longshot bias of 0.09%, compared to a racetrack bias of 2.17%, for their 700-race sample.…”