Biases: The favorite-long shot bias …

In gambling and economics, there’s an observed phenomenon favorite-long shot bias.

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Here’s how it works …

 

On average, bettors tend to overvalue “long shots” and undervalue favorites.

That is, in a horse race where one horse is given odds of 2-to-1, and another 100-to-1, the true odds might for example be 1.5-to-1 and 300-to-1 respectively.

Betting on the “long shot” is therefore a much worse proposition than betting on the favorite.

Various theories exist to explain why people willingly bet on such losing propositions, such as risk-loving behavior, or simply inaccurate estimation.

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One Response to “Biases: The favorite-long shot bias …”

  1. John Carpenter Says:

    I was once asked to assist a professor in doing a tech eval on a computerized “game theory” program she had created. The idea of the program was the prof would gain insight into an individual’s decision processes by recording the choices a participant made when faced with probabilities and rewards. It was essentially just like betting on a horse race.

    I did the eval and, although the prof was only looking for technical info on how the program worked, she noted that I routinely took the long shot. She asked me if this was an element of my test or if I would have made those selections if asked to participate in the real study. I told here those were my “real” choices. When she asked why I went with the long shot I mentioned it is because the bet was so low. As in all the horse races I’ve ever bet on the minimum bet is ridiculously low $2. The reward for betting on the favorite was a meager $0.15….too small to even be worth the effort. So I bet on the $2 or $3 payback, even though it was less likely. A few more bucks reward might make it worth it.

    I wonder if the amount of the wager is considered in these “long shot” studies. For me, the reward for a logical choice was just going to waste my time, so I was “illogical”. It might be more interesting also if the rewards in these games was something other than money. Not sure how that would be “played”. In any case, even in a game, the study has to find some way to compensate for the participant’s own value biases when determining what the reward really means. I wonder if that is routinely done. My prof was clueless.

    I don’t know if the prof ever upped the stakes to make the game more interesting.

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