THE IMPLICATIONS OF A REVERSE FAVOURITE-LONGSHOT BIAS IN A PREDICTION MARKET

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Published: Dec 19, 2012
DOI: https://doi.org/10.5750/jpm.v6i2.499

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Richard Borghesi
Texas State University McCoy College of Business Administration Department of Finance and Economics

Abstract

We examine 330,857 trades of prediction market contracts, the values of which are based on against-the-spread outcomes of NFL games, and find the presence of a significant reverse favourite-longshot bias.  Surprisingly, the timing of this bias is identical to that observed in traditional casino-style NFL betting markets.  That is, late-season away favourites so profoundly underperform expectations that the set of all favourites underperforms on average.  Prior research shows that in prediction markets having asset prices ranging from $0 to $100, win rates are below (above) expectations when prices are low (high).  However, we show that observed win rates for contracts on late-season away favourites are below expectations across all prices.  The presence of a strong RFL bias in a prediction market provides evidence against the theories that this bias is caused by line shading or due to the effects of unpredicted weather variables on team performance.

Article Details

Issue
Vol. 6 No. 2 (2012)
Section
Articles

References

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