The Favorite-Longshot Bias in Prediction Markets: Evidence from Polymarket

Abstract

The favorite--longshot bias (FLB) is one of the most persistent return patterns in betting markets, but its prevalence in modern prediction markets and its relation to recurrent longshot demand remain unclear. We study these questions in Polymarket, a large and increasingly important prediction market, using 588 million trades by 2.48 million accounts. In observed transaction flows, purchases below 10 cents lose 19.3 cents per dollar, while purchases at or above 90 cents earn 0.83 cents. How contracts are grouped changes the result: longshots lose 6.3 cents per dollar when each contract is weighted equally but gain 4.1 cents when related contracts are first grouped by parent event; the two-sided pattern is robust in Crypto and Politics but surprisingly absent in Sports. The top decile of accounts with the strongest past tendency to buy longshots accounts for 26.6 percent of next-month low-price purchases, but earns similar returns to others. The top decile of accounts with the strongest past tendency to buy favorites accounts for 15.1 percent of next-month high-price purchases but earns less than others. These findings provide evidence of an aggregate FLB on Polymarket, but its magnitude depends on how contracts are grouped.