Sunday, May 06, 2007

When the longshot bias disappears

In horse racing it's pretty well known that pari-mutual pools attract a disproportionate amount of money on long-shots. Horses going off at long prices tend to be over bet, while short money horses tend to be under-bet. Research has found this time and again, over decades of studies.

The bias by itself isn't enough to overcome the track take except in the case of very short priced horses, odds on favorites are sufficiently under-bet so that you could actually make a long term profit by just flat betting every odds on favorite. The profit margin would be very slim though.

What that means is that gambler's are willing to pay for a shot at a big payoff. Not really surprising when you think about it. There's not a lot of thrill in cashing a $2 ticket for $2.20. But cashing a $2 ticket for $40 gives you a pretty good kick.

I was reading Why are Gambling Markets Organized so Differently from Financial Markets? by Steven Levitt of Freakonomics fame when I ran across this about NFL betting markets
Bettors exhibit a systematic bias towards favorites

That observation by itself isn't new to me, but he points out in a footnote the difference between this bias and the horseracing favorites/longshot bias. It's just not something I've really thought about before. In NFL betting, payoffs are even money, so there's not really an incentive from a big potential payoff to bet on underdogs, they might be longshots to win, but not with corresponding big payoffs. Of course, after point spread adjustments the underdogs aren't always even longshots to win, which is part of the broader point of the article.

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Blogger HighOnPoker said...

Amarillo Slim, in his book, wrote a little bit about sports betting, and the best advice I took was to play the underdog for the very reason you stated. The lines are often made to benefit the underdog, since most people bet on the favorites. This is even more true when it is a local sportsbook and a local sports team who is also a favorite. The bookies know they will get a lot of action in favor of the local favorites, and therefore, the smart gambler gets their best value for the away underdog. This was written way before Steven Levitt's article, but implies the same result.

11:49 AM  
Blogger DMW said...

I was wondering about that myself. It seemed to me that his "always take the underdog" advice would not make up for the 10% juice on a sports bet.

10:21 AM  
Blogger Gary Carson said...

It doesn't make up for the juice. It's not an exploitable bias, but it's a bias.

That wasn't my point though. The underdog bias is fairly well known, my point was that it doesn't hold up in pari-mutual markets for horse-racing and that the reason for that is this distributional skew for long-shots. (I talk a lot about distributional skew on

9:20 AM  

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