Investigating the roots of the favourite–longshot bias: An analysis of decision-making by supply- and demand-side agents in parallel betting markets

The aim of this chapter is to further the understanding of a behavioural phenomenon which has become an empirically well-established feature of betting markets. This is where the odds which reflect the decisions of individuals in such markets deviate in a systematic way, in terms of implicit probability, from the realized or objective probabilities which are determined by event outcomes. Specifically, this phenomenon, the ‘favourite-longshot bias’ may be summed up thus (Thaler and Ziemba, 1988): ‘Favourites win more often than the subjective probabilities imply, and longshots less often’.