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Quantitative Finance · Glossary

What is Favourite–longshot bias?

Also known as: favourite--longshot bias

Definition 27.6 Markets III: Commodities, Energy and Crypto · Chapter 27 — Prediction and Betting Markets

The favourite–longshot bias is the tendency, documented across betting markets, for bets on longshots to return less per unit staked than bets on favourites, so that longshots’ prices overstate their probabilities.

Realised return per unit staked by odds bucket on a synthetic book of 20 000 eight-runner races whose bookmaker prices implied probabilities proportional to the true probability raised to the power 0.92, with a 10% margin. Favourites lose a few percent; longshots between 50 and 1 000 lose over 40%. Synthetic results. Data: the chapter’s tutorial.
Figure 27.2. Realised return per unit staked by odds bucket on a synthetic book of 20 000 eight-runner races whose bookmaker prices implied probabilities proportional to the true probability raised to the power 0.92, with a 10% margin. Favourites lose a few percent; longshots between 50 and 1 000 lose over 40%. Synthetic results. Data: the chapter’s tutorial.
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