Risk aversion and favourite–longshot bias in a competitive fixed-odds betting market

Abstract

Research on sports betting has generally found a favourite–longshot bias: bets on longshots lose more than bets on favourites. Existing research focuses largely on pari-mutuel betting, but favourite–longshot bias is also evident in fixed-odds online betting markets of the type that are growing rapidly around the world. Explanations for this bias in previous work on pari-mutuel markets cannot explain why it would be a feature of competitive fixed-odds betting markets. We show how disagreement among gamblers and risk aversion on the part of bookmakers in a competitive market can produce a pattern of favourite–longshot bias resembling the empirical evidence.