Bookmaker and pari-mutuel Betting: is a (reverse) favourite-longshot Bias Built-in?

A widely documented empirical regularity in gambling markets is that bets on high probability events (a race won by a “favourite”) have higher expected returns than bets on low probability events (a “longshot” wins). Such favourite-longshot (FL) biases however appear to be more severe and per-sistent in bookmaker markets than in pari-mutuel markets; the latter sometimes exhibit no bias or a reverse FL bias. Our results help understand these differences: the odds grid in bookmaker markets leads to a built-in FL bias, whereas that used in pari-mutuel betting pushes these markets toward a reverse FL bias. This paper benefited from helpful comments from an anonymous referee, Michael Mandler, David Metcalf, David Paton, Jonathan Wadsworth, Justin Wolfers, and par-ticipants of the conference on “The Growth of Gambling and Prediction Markets: Economic and Financial Implications” in May 2007. We are grateful to Paul David-son, Tony Lusardi, Chris Ralph, and Leighton Vaughan Williams for information about bookmaker odds and bookmaker software