The Favorite-Longshot Bias: An Overview of the Main Explanations

In betting markets, the expected return on longshot bets tends to be systematically lower than on favorite bets. This favorite-longshot bias is a widely documented empirical fact, often perceived to be an important deviation from the market efficiency hypothesis. This chapter presents an overview of the main theoretical explanations for this bias proposed in the literature. ∗London Business School and Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208-2013. Phone: +1—843—467—0684. Fax: +1—843—467—1777. E-mail: [email protected]. Web: http://faculty.london.edu/mottaviani. †Department of Economics, University of Copenhagen, Studiestræde 6, DK—1455 Copenhagen K, Denmark. Phone: +45—3532—3056. Fax: +45—3532—3000. E-mail: [email protected]. Web: http://www.econ.ku.dk/sorensen.