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Best Value Bets
Professor Leighton V Williams
June 2003
Favourites are best value bets
In his paper, Griffith produced evidence, derived from the US racetrack, that the shorter the odds on a horse, the better on average the value. In other words, those who systematically bet on the favourite (the horse with the shortest odds) would over the long-term win more, or at least lose less, than those backing any other horse or horses in the field. In the long term, favourites are better value bets – a phenomenon known as the favourite-longshot bias.
This was a startling discovery because it suggested that it was possible to earn above-average returns by following a simple system that required no knowledge of anything other than the available odds.
This was significant not only for racing punters but also for economists interested in the operation of markets, and in particular financial markets. Economists are particularly interested in understanding why and under what circumstances markets are NOT efficient. The answers to these questions will tell them how to do better than average.
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The favourite-longshot bias defined
There is a consistent deviation from the theoretical scenario in which average returns are the same across all odds. In fact, longshots return less money on average than shorter priced horses. Put another way, if prices were 'fairer', longshots ought to be at even longer odds.
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Certainly, Griffith's work shows that the betting market is not efficient. How could betting markets leave open this loophole? The answer has fascinated economists ever since, and has teased out some interesting explanations.
Are punters just simple risk takers?
The most obvious explanation is that those who bet at the racetrack simply like risk, and so don't want to back favourites. Favourites are, after all, the least risky option of all the choices available to the punter because they win, on average, more often than any other available option. Those who like the thrill of the chase would, therefore, according to this explanation, steer clear from these relatively safe bets, and tend to favour alternatives (the longshots) which pay out less often but which pay out more when they do come in. This is the 'lottery effect', the observed tendency of people to flock to the opportunity of winning a large sum of money in one go, even though the probability of doing so is small.
The problem with this interpretation of the evidence of a favourite-longshot bias is that it conflicts with the tenets of all conventional economic theory. Economic research shows that people are, in general, risk-averse, which means that they need to be compensated for taking on extra risk. For example, an investor would require a higher expected return for venturing a thousand pounds into an exploratory oil venture in South America than for investing the same thousand pounds in a savings account at a local high street bank.
One explanation for the different attitude to risk exhibited by betting punters and investors is that money spent in a betting context is treated differently to money spent in an investment context. This is the idea that people employ 'mental accounts' into which they file different sorts of expenditure.
Such an explanation is convenient, of course, because it allows us to simply explain away any observed anomalies as simply a special case. On this basis, however, it's possible to construct as many special cases as there are anomalies, a solution which is an anathema to most scientists, and no less so to traditional mainstream economists.
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