Favourite-longshot bias

In gambling and economics, the favourite-longshot bias is an observed phenomenon where on average, bettors tend to overvalue "long shots" and undervalue favourites. That is, in a horse race where one horse is given odds of 2-to-1, and another 100-to-1, the true odds might for example be 1.5-to-1 and 300-to-1 respectively. Betting on the "long shot" is therefore a much worse proposition than betting on the favourite. In the long run, losing 5% by betting on the favourite, but losing 40% on longshots is not uncommon. Various theories exist to explain why people willingly bet on such losing propositions, such as risk-loving behavior, risk-averse behavior^[1] or simply inaccurate estimation as presented by Sobel and Raines.^[2]

See also

• Rank-dependent expected utility

References

1. ↑ "We discount the chances of any party at 100/1 or bigger. The reverse of tweak 1 applies here. Almost all of these probably have effectively zero chance. Why don’t we just make them a bigger price? We don’t think we’ll take much extra money, certainly not enough to compensate us for the day we get it wrong." Matthew Shadwick, Ladbrokes, 2010-02-25. See Ladbrokes Election Forecast Feb 25th 2010
2. ↑ Russell S. Sobel & S. Travis Raines, 2003. "An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting," Applied Economics, Taylor and Francis Journals, vol. 35(4), pages 371-385, January

• http://favourite-longshot-bias.behaviouralfinance.net/
• http://www.bettingtools.co.uk/blog/favourite-longshot-bias/