Economica, 2024.
My first paper using the “agreeing to disagree” framework. It models a competitive market in which bookmakers set odds with a margin to cover costs. Adding the margin means volumes change so that more favourite bettors drop out than longshot bettors. This changes the risk composition for bookmakers so that if they are risk averse, the market will worsen odds on longshots to reduce risk.
Key research finding: You can get favourite-longshot bias even in a market where bettors are correct on average in their assessment of probabilities and bookmakers are competitive.
Practical advice: None really. There’s no practical advice here, but the framework developed here has been very useful in explaining betting markets.