Best Value Bets

Professor Leighton V Williams

June 2003

Can betting be explained by normal economic principles?

For this reason, economists have more recently addressed the issue of the favourite-longshot bias within a more broad-based framework. Such approaches seek to explain the bias as a natural consequence of established economic principles, which avoids the need to consider the betting market and/or punters as in any way special or different.

One such approach is to regard a bookie as somebody facing the problem of setting odds in the face of a number of individuals, of uncertain identity, who may know more than they do. These individuals are usually called 'insiders' in racing. An insider may be privy to all sorts of background information on a particular horse, its form, its fitness and its training record. In this case, the insider may know more than the bookies. A situation that bookies are always alert to.

In an environment of punters and insiders, the bookies may seek to contract those odds which expose them to the greatest potential liabilities. That is, they make the longest odds shorter, so 20-1 might come down to 15-1, for example. This means that the longest prices are the least fair, but it cushions the bookies from paying out large sums of money to insiders who may know a lot more about a particular horse than they do.

One problem is that this doesn't explain the existence of a bias (albeit of less extent) in markets like the Tote, where winning punters share the pool of all bets. After all, there is no bookie in such markets to take fright at the informed insiders.

Another explanation is that punters may overlook some fraction of their losses, but not their winnings. If so, it can be shown that punters will tend to bet too much, relative to the objective chance of success, and will do so increasingly as the odds lengthen.

Insider activity forces bookies to shorten the odds on longshots

In my own work, I have sought to distinguish between these competing explanations by examining whether the bias against longshots is particularly strong where insiders have the greatest potential to operate. The evidence suggests that this is indeed the case. We have an indication that shortening of odds at the longer end of the spectrum in response to the threat of insider activity is at least a partial explanation of the established favourite-longshot bias. It does not, of course, explain the bias in the Tote and US betting markets, which operate on a 'share-of-the-pool' basis.

Surprisingly perhaps, the well-established phenomenon of a favourite-longshot bias, apparent in most studies of the US, UK, Ireland, Australia, New Zealand and elsewhere, is absent in studies of racing in Hong Kong and Japan. Perhaps the difference can be explained by the motivation of punters at Asian racetracks. At those tracks, where the pools and rewards are particularly large, it may be that punters are operating more like investors.

Favourites appear also to offer no special advantage in the US baseball betting market. Unlike racetrack markets in the US, which work on a share-of-the-pool basis, the American baseball market is conducted at fixed odds, ie the odds are given at the time that the bet is struck. One explanation for this has been couched in terms of the type of punter (relatively sophisticated) inhabiting the baseball betting scene, in an environment characterized by relatively low costs.

A recently published analysis of English Premier League football confirms the existence of the traditional favourite-longshot bias for football. Meaning that the odds available with fixed-odds bookies on the favourite of two teams are better value on average than the odds available on the underdog. In other words, if you know nothing else about football, your best bet is to back the shorter-priced team. Among correct score odds, incidentally, the best value, according to the study, seems to lie in backing very strong favourites to win by 1-0, 2-0, 2-1 or 3-2.

In summary, the jury is still out on what causes the favourite-longshot bias, and where it occurs. Indeed, there have been many juries sifting the evidence over the last half-century or so. The verdict, if and when it is finally delivered, will be important not only for our understanding of the efficiency of markets, but also for our understanding of the way in which we perceive and respond to risk and uncertainty.

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