With the introduction of Betfair and other exchanges where overrounds on popular markets are much smaller than with the bookmakers, the favourite longshot bias is perhaps not as prevalent as it once was. There is now much more competition in the markets generally and standout prices are often offered on outsiders to attract custom. So, does the Favourite Longshot Bias still exist?
If you’re not familiar with the theory it is basically the fact the most bettors tend to over value outsiders and under value favourites. Bookmakers are known to set prices on underdogs much lower than they realistically should be as it’s easier for them to do this and still get a lot of money for the selection.
The average bettor wants a decent as possible return for his money and would rather bet on a 5-1 shot which unbeknownst to them is probably a 8-1 shot, than a 1-3 shot that really is a 1-3 shot. The stakes the average bettor will be using would also be such that betting at 1-3 does not give them a return which will interest them financially.
Most bettors won’t recognise the fact that a 5-1 shot should be a 8-1 shot and they would be more put off by only winning £2 on a favourite as opposed to £3 and are in fact unlikely to bother betting on such favourites either way.
Pricing this way is a case of risk reward for the bookmaker and they would rather have a lower liability in relation to what they can win. Reducing prices of outsiders means that when they do get hit by an outsider winning it will be covered by the many losers punters have had on these kinds of selections over the long term.
Odds on favourites are easier to price up and it’s on the bigger prices that the bookmakers feel they need to protect themselves against informed insiders and the general public exploiting new information. This is particularly important for the bookmaker in the horse racing markets.
Data collected by football-data.co.uk as recent as May 2013 that used data from 2010-2012 showed that the bias definitely still exists in the tennis markets. The table below shows that even by finding the best odds on selections at odds of 5 and above, you’d still lose nearly 20% of your funds. Finding the best odds on those selections under evens (2.0) and you would be looking at a profit. Quite a difference!
Shows the percentage returns on tennis matches when finsing the best market price
(data collected 2010-12 courtesy of football-data.co.uk)
If the bias still exists in tennis where overrounds are usually much tighter due to the fact there are only 2 outcomes, then it almost certainly exists in football and horse racing where margins are bigger and there are many more casual punters.
This is not to say that you couldn’t or can’t win backing longshots and if you are selective and can spot a price that is out of line you can still profit.
Since the arrival of betfair and other exchanges where outsiders are much more accurately priced, profiting on longshots should be a much more realistic proposition. What doesn’t change however are people’s staking habits.
A 5-1 shot could realistically lose at least 30 times in a row and more especially if the real price is 8-1. You’re average bettor might place £10 on such a selection but can he/she survive even 20 losses in a row and still afford to bet £10 again? Many will not be able to and won’t believe that such a bad run is possible. At the same time they might be more cautious about having too much more than their usual stake on a 1.2 shot when in fact regularly backing at longer odds is likely to be much more costly.
So it’s not just the backing longer prices at poor value that’s a problem here it’s the amount the average bettor is prepared to stake on longer priced selections when they a) can’t really afford to withstand the losing streak b) wouldn’t have a similar proportioned stake on a short priced favourite. Even in a perfect market with no over round we still see a bias towards the underdog.
Two of my friends were in fact having a debate about which kind of odds they prefer and feel they had more chance of profiting from. Both agreed that they’d rather back the outsiders or prices they considered ‘value’.
Value however is not just about a good return on your money. It’s about finding a bet that wins more than the odds suggest and this is something a lot of regular bettors fail to recognise and evaluate. One of my friends tends to use the same bookmaker for all his bets too and so it’s very unlikely that he will find value on his selections on a regular basis.
Many people won’t touch short priced favourites simply because of the return they offer and they think you have to go all in or stake half of their bank on them. Betting on short priced favourites however (still selectively) can be a very good way to grow a bank.
Just when do you increase stake when you are backing outsiders? The variance can be huge and choosing to increase at the start of a bad run could be particularly damaging. You can use a greater proportion of your available funds on short favourites and reinvest profits with much more confidence. Even if you do pick one that in hindsight wasn’t great value, the odds of winning that individual bet are still with you.
We are of course only talking about pre-match bets here and in play betting on the exchanges shows an opposite of the bias with people overestimating the chances of the leader. When a favourite takes a winning position early on it reaffirms what the market already believed and people get greedy pushing the price unrealistically low. This type of scenario can be exploited by traders and big profits are possible.
So, if you are looking to back a longshot pre-event make sure you have good reason to and that this is enough to compensate for the poor value you would likely get on average on this type of selection. Make sure you also shop around and get the best odds available or as close to as possible. If in doubt, stick to favourites!