Loss aversion and mental accounting: the favorite longshot bias in parimutuel betting

Arbeitspapier

Parimutuel betting markets are simplified financial markets, and can thus provide a clearer view of pricing issues which are more complicated elsewhere. Though empirical studies generally conclude that the parimutuel betting markets are surprisingly efficient, it is also found that for horses with lowest odds (favorites), market estimates of winning probabilities are smaller than objective winning probabilities; for horses with highest odds (longshot), the opposite is observed. This phenomenon, called the favorite longshot bias, has many explanations such as risk seeking preference, transaction costs, and non-linear transformation of probabilities into decision weights, etc. This paper combines loss aversion with mental accounting, and provides a new explanation for the favorite longshot bias. We show that the bias exists in the absence of all above mentioned reasons, and the degree of the bias differs depending on the type of the mental accounting process that bettors apply.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Jena Economic Research Papers ; No. 2007,017

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Noncooperative Games ; Market Structure, Pricing, and Design: General ; Criteria for Decision-Making under Risk and Uncertainty ; General Financial Markets: General (includes Measurement and Data)
• Thema: loss aversion ; mental accounting ; parimutuel betting ; the favorite longshot bias ; Verlust ; Risikoaversion ; Glücksspiel ; Prospect Theory ; Bias ; Nichtkooperatives Spiel ; Theorie

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Qiu, Jianying
• Ereignis: Veröffentlichung
• (wer): Friedrich Schiller University Jena and Max Planck Institute of Economics
• (wo): Jena
• (wann): 2007

Weitere Informationen

• Handle: http://hdl.handle.net/10419/25591
• Letzte Aktualisierung: 10.03.2025, 11:41 MEZ