Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/36914 
Year of Publication: 
2010
Series/Report no.: 
IZA Discussion Papers No. 4884
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
The favorite-longshot bias describes the longstanding empirical regularity that betting odds provide biased estimates of the probability of a horse winning - longshots are overbet, while favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet longshots due to risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel empirical tests that can discriminate between these competing theories by assessing whether the models that explain gamblers' choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including compound bets in the exacta, quinella or trifecta pools. Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory.
Subjects: 
Pricing under risk
probability weighting
compound lotteries
favorite-longshot bias
JEL: 
D03
D49
G12
L83
Document Type: 
Working Paper

Files in This Item:
File
Size
529.11 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.