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Changes in risk preferences: Evidence from Swedish harness horse racing data

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  • Koivuranta, Matti
  • Korhonen, Marko

Abstract

We measure the time variation of risk preferences in real market data. We utilize data on Swedish tote-betting on horse races for the period 1995 to 2015 and show that risk preferences among horse-race bettors change with economic conditions. More specifically, we extract a measure of risk-aversion based on the favorite-longshot bias (FLB) and provide evidence that the computed measure follows the consumer-confidence index. In addition, we show by an application that the FLB-based risk-preference measure sharpens the predictions of a simple forecasting model for Swedish industrial production. Furthermore, we show that risk-aversion consistently increases following shocking news on disastrous events, including non-economic events such as natural disasters and terrorist attacks. We argue that emotions, such as fear, are the likely explanation for this variation.

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  • Koivuranta, Matti & Korhonen, Marko, 2021. "Changes in risk preferences: Evidence from Swedish harness horse racing data," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 16-32.
    • Handle: RePEc:eee:jeborg:v:187:y:2021:i:c:p:16-32
    DOI: 10.1016/j.jebo.2021.04.034
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