(with Tadgh Hegarty), Oxford Economic Papers, 2026.
My favourite paper I’ve written, co-authored with Tadgh Hegarty, who has spent many years working as a bookmaker.
How do bookmakers set odds? Well, bookmakers are firms and economics has theories about how firms set prices. This paper uses those theories and confirms they explain the odds.
Online discussions focus on the idea that bookmakers seek to minimise risk by setting odds so they get the same profit no matter who wins the event. But economics teaches us that firms seek to maximise profits, not minimise risk. And a key result in microeconomics is that profit-maximising firms set prices based on elasticity of demand – if the customers are very price sensitive, you have to offer them low prices and if they are not, you can charge them high prices. We show how this explains why bets on longshots do so much worse than bets on favourites.
It works like this. Bettors disagree about the probabilities of outcomes in a way that makes longshot bettors willing to accept bad odds. Suppose Man City play Burnley and are 80% likely to win. An optimist on City thinks they have a 90% chance of winning and will take slightly worse odds – odds that are one-ninth worse than the break-even odds. But the poor Burnley enthusiast thinks they have a 30% chance of winning, compared with the true 20% chance, so they are willing to take odds that are 50% worse than the break-even odds and their losses are thus much worse. Bookmakers understand these patterns and set the odds accordingly.
We show the pattern of loss rates for 150,000 home/away/draw (1X2) bets on soccer matches fits with the model’s prediction of a strong favourite-longshot bias effect.
We also look at Asian handicap pricing for the same games. This is a very competitive market with highly price-sensitive customers. We find no evidence of the pattern of bet returns getting worse as the win probability falls.
Key research finding: Favourite-longshot bias stems from disagreement among bettors and the betting market’s competitive structure.
Practical advice: If you’re going to bet with retail bookmakers, longshots are where you will lose the most.