Saturday, May 7, 2011

Quant Fact: Long-Shot & Favorite Bias

Just a quick blog post on a "quant fact" related to some big sporting events today. In addition to the Kentucky Derby -- there is a big-name boxing match-up between Shane Mosley and Manny Pacquiao.

We think it is interesting that historically, there is a "long-shot-favorite bias" whereby the public overvalues long-shots and undervalues favorites.

In both horse racing and boxing, there are often mismatches. And due to these mismatches, there are long-shots that are more interesting for the general public on which to place a small wager. After all, it is more exciting to take an underdog and win $50 on a $10 bet -- than to win $2 on a $10 bet. This creates value for some -- who follow the stats and numbers.

Here is a paper on this bias: