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

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  • Jianying Qiu

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Abstract

In this paper it is shown that the combination of mental accounting and loss aversion can fundamentally changes people's way of evaluating risky alternatives. The observation is applied in a market setting: Parimutuel betting markets. In parimutuel betting markets it has been 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 (the favorite-longshot bias). I build a game theoretical model and show that the favorite-longshot bias is the equilibrium play of the players with loss aversion, and that the degree of the favorite-longshot bias depends on the mental accounting process the players use.

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File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2009-15.pdf
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Bibliographic Info

Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2009-15.

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Length: 25
Date of creation: May 2009
Date of revision:
Handle: RePEc:inn:wpaper:2009-15

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Keywords: loss aversion; mental accounting; parimutuel betting; the favorite-longshot bias.;

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  1. Frédéric KOESSLER & Anthony ZIEGELMEYER & Marie-Hélène BROIHANNE, 2002. "The Favorite-Longshot Bias in Sequential parimutuel Betting with Non-Expected Utility Players," Working Papers of BETA 2002-12, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Frédéric Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Papers on Strategic Interaction 2005-12, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Marco Ottaviani & Peter Norman Sørensen, 2004. "The Timing of Bets and the Favorite-Longshot Bias," FRU Working Papers 2004/12, University of Copenhagen. Department of Economics. Finance Research Unit.
  4. Frederic Koessler & Ch. Noussair & A. Ziegelmeyer, 2005. "Individual Behavior and Beliefs in Experimental Parimutuel Betting Markets," THEMA Working Papers 2005-08, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
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