UNFAIR GAMES, SUBJECTIVE PROBABILITIES, AND FAVOURITE-LONGSHOT BIAS IN FINNISH HORSE RACING

Abstract

This paper discusses risky and uncertain decision-making in the framework of gambling. The well-known anomaly of favourite-longshot bias is considered. We argue that gambling behaviour can be seen as consumption. Thus, gambling behaviour is more than a risky choice. It is reasonable to assume that the price of gambling is the take-out rate or the expected loss. We illustrate, with some elementary gambling, that the gambling markets constitute an environment where risky choices can be measured only with probabilities. Typical gambling behaviour (e.g. horse betting) is modelled by an approach that includes the attractiveness of risk, subjective probability, and the utility of money. We tested the favourite-longshot bias with a large accumulated dataset from Finnish horse race tracks that monitored more than 27,000 races over a five-year period. The empirical results indicate that Finnish gamblers’ behaviour is biased: they gamble too little on favourites and too much on longshots. Our results confirm the universality of the favourite-longshot bias that can be found in Western Europe, Australia and the USA.