Sunday, 23 May 2010

Punting Psychology

Continuing from the last post, and the favourite-longshot bias, just why should it be that even if it doesn't make financial sense to do so, people continue to support the underdog?

The conclusion of studies appears to be that it's not simply because we get some special pleasure from playing the horses at 100/1; it's because we tend to overestimate the long shots' chances.

This bias might be explained by a tendency that behavioral economists have labeled the "availability heuristic": We make judgments about probability based on whatever data spring most easily to mind. The examples you remember are the ones that influence your beliefs. If you've just watched hours of footage about 9/11, for example, you might think you're more likely to die in a terrorist attack than in a car accident.
A study by the Broadcasting Standards Council found that Crimewatch UK increased the fear of crime in over half of its respondents, and a third said it made them feel "afraid".

We are apparently quite easily influenced. A few years ago, a graduate student named Nadav Goldschmied invited students to read a fake newspaper article about an upcoming rugby match. According to the article, odds makers had given one of the teams just a 30 percent chance of victory. When asked to make their own predictions, the students were more optimistic. Instead of pegging the underdog's odds at 30 percent, they guessed it was more like 41 percent. If the article specifically referred to the disadvantaged team as an "underdog," the effect was even stronger, with the students pegging the chance of victory at 44 percent.

Goldschmied repeated the experiment twice more, replacing the rugby teams with mayoral candidates and then a pair of businesses competing for a contract. In each case, the results were the same: The mere act of labeling one side as an underdog made the students think they were more likely to win.

1 comment:

Anonymous said...

I think the favourite-longshot bias study's a bit irrelevant if we look at things in terms of Betfair odds. Whilst we still have some overround to contend with it's no where near the bookmakers 1% or so per runner. Pre betfair, bookmakers would typically price the non hopers around 66/1 whereas now you'll be seeing plenty at 1000.

We're also now faced with amateur layers willing to push prices up due things like liquidity, the desperation to get filled etc. I'm sure when someone runs a similar study in years to come, based on Betfair odds, that bias may be level or if anything show a positive bias towards the outsiders