Longshot bias

So its now July 30, but below we share the predicted results based off the betting markets on July 22. One small thing we did is to tweak the model a little bit to deal with the longshot bias. This has changed the results a bit.

What exactly is the longshot bias? 

In gambling, it is an empirically regular occurrence that bettors tend to overvalue the the longshot (ie. the outcome or candidate that has a very low chance of winning). And they tend to undervalue the favorite. So in betting odds, we might see that ALP candidate pays out $5 for a $1 bet, while the Coalition candidate will only pay out $1.30 for a $1 bet. The ALP candidate is the longshot, the Coalition is the favorite. But the true underlying odds might be $8 for the ALP and $1.10 for the Coalition. Because bettors have a bias in betting on the longshot, this will increase the demand for that outcome, thus reducing the payout.

What are some explanations of the longshot bias?

Justin Wolfers and Erik Snowberg have a nice paper that looks at two competing theories of the longshot bias. The traditional thinking is that some punters are risk loving in nature. This assumes that the punters are rational, but bet on the longshot because they derive utility from taking risky bets. Given a choice between guaranteed $25 or a gamble with 25% chance of winning $100, the risk loving person takes the gamble even though the expected value of both choices are the same. They love the punt.

The paper looks at another possibility and concludes that this is a bigger driver of the longshot bias. The authors argue that nope, the bettors arent really rational, risk loving economic actors. Nope, they’re just naughty children with misguided perceptions of probability!

How do we correct for longshot bias and how did this affect results?

Having learned a bit more re this longshot bias lark, we decided that in seats where a candidate has less than 10% chance of winning, this is effectively a longshot. For those seats, we rounded it down to 0. The effect of this is pretty stark. Looking at the category of ‘other’, it has gone down to only 2 seats. This is due to the changes we made to the model, not changes in the betting odds. Let’s compare this to what we’re seeing in the real world by having a look at the MPs who are currently in the ‘other’ category.

It looks like with Rob Oakeshott and Tony Windsor both retiring, Lyne and New England are definitely in play for the major parties. And Tony Crook has also retired, putting O’Connor in play too.

Adam Bandt (Melbourne: Greens) benefited from Liberal preferences at the last election and will be hoping to take advantage of the progressive vote being angered by the hardline ALP asylum seeker position. But it looks like he might struggle to hold onto Melbourne if the chat is true that the Liberals will preference the ALP in this election.

Andrew Wilkie is looking pretty good in Denison, having scored some union love from the NTEU. We love it he’s up against newcomer Jane Austin from the ALP. People have been making high brow literary jokes about her name – we have instead chosen to focus on the metropolitan hospital genre but have come up short. Everyone’s favorite Katter’s Australian Party candidate, Bob Katter, is also looking pretty good in his seat. So if we’re counting right, the two predicted seats for ‘other’ are Wilkie and Katter. If you’ve heard anything different, let us know.

One thought on “Longshot bias

  1. Pingback: election lab | Our final predictions: how did they go?

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