A vital start to examine influences on the FLB lies in the question if there is actually an FLB present in our data set. This research question should give us that answer.
As we mentioned in the introduction bookmakers have a special business model; by setting the betting odds themselves decisions of bettors can be influenced in favour of their own gain. This business model encourages betting agencies to research biases in investor behaviour, because, argued by many papers, investors are not always rational in their investment choices. In the literature on sports betting markets, the Favourite-Longshot Bias (FLB) is one of the biases that has been investigated a lot in previous studies. In simple words, this is the term for the financial behaviour …show more content…
According to the theory on the FLB, investors who systematically bet on the favourite will end up with a higher return than investors betting on the longshot. Hurley and McDonough (1995) argue that uninformed agents presented in the market are the explanation for this phenomenon. Instead of betting on the favourites with a high probability chance they prefer a high return and bet too much on an unlikely outcome. More recent studies by Snowberg and Wolfers (2010) point in the direction of the investors’ risk profile to explain this bias. Some bettors in this market could be labelled as ‘risk-lovers’. A third reason is found in the strategy of bookmakers. Lahvicka (2014) claims that bookmakers respond to a market with informed bettors, similar to the widening of the bid-ask spreads which is used as an instrument in economic price-driven markets to counter informed investors (Easley and O’Hara, 1987). In contrast with this reasoning, the FLB was found in sports betting markets excluded from bookmakers’ influences too. Abinzano et. Al (2016) is thereby disputing …show more content…
An assessment of the probability of an outcome and the result of that outcome can be used to calculate what a reasonable price for a bet would be. Before 1738 the same logic was present and only rational decision-makers were considered. Problems would always be resolved through mathematical expectation. All possible results would be multiplied with the expectancy of that result happening, consequentially having a weighted mean to make decisions on. Nicolas Bernoulli, however, found a problem to this theory which he addressed in a letter to De Montmort (1713). After a failed bet one could simply double the bet and play again to cover the loss. This so-called Sint-Petersburg paradox was solved by Bernoulli (1738) by putting emphasis on different judgements of people with a different moral expectation. A utility function could explain the differences between people in different circumstances. Nowadays the ‘expected utility hypothesis’ is used as a term for moral
As we mentioned in the introduction bookmakers have a special business model; by setting the betting odds themselves decisions of bettors can be influenced in favour of their own gain. This business model encourages betting agencies to research biases in investor behaviour, because, argued by many papers, investors are not always rational in their investment choices. In the literature on sports betting markets, the Favourite-Longshot Bias (FLB) is one of the biases that has been investigated a lot in previous studies. In simple words, this is the term for the financial behaviour …show more content…
According to the theory on the FLB, investors who systematically bet on the favourite will end up with a higher return than investors betting on the longshot. Hurley and McDonough (1995) argue that uninformed agents presented in the market are the explanation for this phenomenon. Instead of betting on the favourites with a high probability chance they prefer a high return and bet too much on an unlikely outcome. More recent studies by Snowberg and Wolfers (2010) point in the direction of the investors’ risk profile to explain this bias. Some bettors in this market could be labelled as ‘risk-lovers’. A third reason is found in the strategy of bookmakers. Lahvicka (2014) claims that bookmakers respond to a market with informed bettors, similar to the widening of the bid-ask spreads which is used as an instrument in economic price-driven markets to counter informed investors (Easley and O’Hara, 1987). In contrast with this reasoning, the FLB was found in sports betting markets excluded from bookmakers’ influences too. Abinzano et. Al (2016) is thereby disputing …show more content…
An assessment of the probability of an outcome and the result of that outcome can be used to calculate what a reasonable price for a bet would be. Before 1738 the same logic was present and only rational decision-makers were considered. Problems would always be resolved through mathematical expectation. All possible results would be multiplied with the expectancy of that result happening, consequentially having a weighted mean to make decisions on. Nicolas Bernoulli, however, found a problem to this theory which he addressed in a letter to De Montmort (1713). After a failed bet one could simply double the bet and play again to cover the loss. This so-called Sint-Petersburg paradox was solved by Bernoulli (1738) by putting emphasis on different judgements of people with a different moral expectation. A utility function could explain the differences between people in different circumstances. Nowadays the ‘expected utility hypothesis’ is used as a term for moral