IDEAS home Printed from https://ideas.repec.org/a/bla/econom/v76y2009i302p251-263.html
   My bibliography  Save this article

A More General Non‐expected Utility Model as an Explanation of Gambling Outcomes for Individuals and Markets

Author

Listed:
  • DAVID PEEL
  • DAVID LAW

Abstract

One feature of experimental work is the heterogeneity in risk attitudes and probability distortion displayed by agents. We outline a more general non‐expected utility model, which nests the models of Markowitz, and Kahneman and Tversky. The model can generate the standard favourite–longshot bias or a reverse favourite–longshot bias as a result of optimal behaviour. We also provide new empirical evidence on the relationship between Tote and bookmaker returns and confirm that the relationship is not as originally conjectured by Gabriel and Marsden. We outline how our new model can provide an explanation of the relationship that is observed.

Suggested Citation

  • David Peel & David Law, 2009. "A More General Non‐expected Utility Model as an Explanation of Gambling Outcomes for Individuals and Markets," Economica, London School of Economics and Political Science, vol. 76(302), pages 251-263, April.
    • Handle: RePEc:bla:econom:v:76:y:2009:i:302:p:251-263
    DOI: 10.1111/j.1468-0335.2008.00736.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-0335.2008.00736.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-0335.2008.00736.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Michael Cain & David Peel, 2004. "Utility and the Skewness of Return in Gambling," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(2), pages 145-163, December.
    2. Michael Cain & David Law & David Peel, 2008. "Bounded cumulative prospect theory: some implications for gambling outcomes," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 5-15.
    3. Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 395-407.
    4. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    5. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60(2), pages 151-151.
    6. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    7. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    8. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    9. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-196, March.
    10. Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-815, August.
    11. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
    12. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. "Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
    13. Patrick L. Brockett & James R. Garven, 1998. "A Reexamination of the Relationship Between Preferences and Moment Orderings by Rational Risk-Averse Investors," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 23(2), pages 127-137, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bruce, A.C. & Johnson, J.E.V. & Peirson, J., 2012. "Recreational versus professional bettors: Performance differences and efficiency implications," Economics Letters, Elsevier, vol. 114(2), pages 172-174.
    2. David Alan Peel, 2013. "On the Implications of the Markowitz Model of Utility embodying Gain Seeking Preferences for Odds on Betting and Bookmakers choice of Spread or Odds Betting," Economics Bulletin, AccessEcon, vol. 33(2), pages 1420-1428.
    3. Philip W. S. Newall & Dominic Cortis, 2021. "Are Sports Bettors Biased toward Longshots, Favorites, or Both? A Literature Review," Risks, MDPI, vol. 9(1), pages 1-9, January.
    4. Jaiho Chung & Joon Ho Hwang, 2010. "An Empirical Examination of the Parimutuel Sports Lottery Market versus the Bookmaker Market," Southern Economic Journal, John Wiley & Sons, vol. 76(4), pages 884-905, April.
    5. Jeremy Sandford & Paul Shea, 2013. "Optimal Setting of Point Spreads," Economica, London School of Economics and Political Science, vol. 80(317), pages 149-170, January.
    6. Alistair Bruce & David Marginson, 2014. "Power, Not Fear: A Collusion-Based Account of Betting Market Inefficiency," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 21(1), pages 77-97, February.
    7. Linda M. Woodland & Bill M. Woodland, 2011. "The Reverse Favorite-Longshot Bias in the National Hockey League: Do Bettors Still Score on Longshots?," Journal of Sports Economics, , vol. 12(1), pages 106-117, February.
    8. Valeria De Bonis & Alessandro Gandolfo, 2015. "Predictors of gambling among university students: the role of gender, sociality and attitudes towards risk," Public Finance Research Papers 11, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David A. Peel & Davind Law, 2009. "An Explanation of Optimal Each-Way Bets based on Non-Expected Utility Theory," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 3(2), pages 15-35, September.
    2. D. A. Peel & Jie Zhang & D. Law, 2008. "The Markowitz model of utility supplemented with a small degree of probability distortion as an explanation of outcomes of Allais experiments over large and small payoffs and gambling on unlikely outc," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 17-26.
    3. Horst Zank, 2010. "On probabilities and loss aversion," Theory and Decision, Springer, vol. 68(3), pages 243-261, March.
    4. Peter Brooks & Horst Zank, 2005. "Loss Averse Behavior," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 301-325, December.
    5. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    6. Julius Pahlke & Sebastian Strasser & Ferdinand Vieider, 2015. "Responsibility effects in decision making under risk," Journal of Risk and Uncertainty, Springer, vol. 51(2), pages 125-146, October.
    7. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    8. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    9. Ryan O. Murphy & Robert H. W. ten Brincke, 2018. "Hierarchical Maximum Likelihood Parameter Estimation for Cumulative Prospect Theory: Improving the Reliability of Individual Risk Parameter Estimates," Management Science, INFORMS, vol. 64(1), pages 308-328, January.
    10. Georgalos, Konstantinos & Paya, Ivan & Peel, David A., 2021. "On the contribution of the Markowitz model of utility to explain risky choice in experimental research," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 527-543.
    11. Pavlo R. Blavatskyy, "undated". "A Stochastic Expected Utility Theory," IEW - Working Papers 231, Institute for Empirical Research in Economics - University of Zurich.
    12. Hans-Martin von Gaudecker & Arthur van Soest & Erik Wengstrom, 2011. "Heterogeneity in Risky Choice Behavior in a Broad Population," American Economic Review, American Economic Association, vol. 101(2), pages 664-694, April.
    13. George Wu & Alex B. Markle, 2008. "An Empirical Test of Gain-Loss Separability in Prospect Theory," Management Science, INFORMS, vol. 54(7), pages 1322-1335, July.
    14. Ferdinand M. Vieider & Peter Martinsson & Pham Khanh Nam & Nghi Truong, 2019. "Risk preferences and development revisited," Theory and Decision, Springer, vol. 86(1), pages 1-21, February.
    15. Hans-Martin Gaudecker & Arthur Soest & Erik Wengström, 2012. "Experts in experiments," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 159-190, October.
    16. Peel, D.A. & Zhang, Jie, 2009. "The expo-power value function as a candidate for the work-horse specification in parametric versions of cumulative prospect theory," Economics Letters, Elsevier, vol. 105(3), pages 326-329, December.
    17. E. Elisabet Rutstrom & Glenn W. Harrison & Morten I. Lau, 2004. "Estimating Risk Attitudes in Denmark," Econometric Society 2004 Australasian Meetings 201, Econometric Society.
    18. D. A. Peel, 2008. "Introduction: economics of betting markets," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 1-3.
    19. Jie Zhang & Ivan Paya & David Peel, 2010. "An Empirical Analysis of Choices Between Gambles of Children and Adults in China," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 4(1), pages 1-18, March.
    20. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:econom:v:76:y:2009:i:302:p:251-263. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.