Favorite-Longshot Bias in Parimutuel Betting: an Evolutionary Explanation

Abstract

We offer an evolutionary explanation for the favorite-longshot bias in pari-mutuel betting, in a simple evolutionary market model. Because of a positive track take, the expected returns of any strategy stay negative and so any agent must vanish in the long run. Those who bet on favorites lose steadily whereas those who favor long shots have some chances of getting ahead with rare but large gains to survive longer. This relative advantage results in overvaluation of long shots.