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Estimating risk preferences of bettors with different bet sizes

Listed author(s):
  • Feess, Eberhard
  • Müller, Helge
  • Schumacher, Christoph
Registered author(s):

    We extend the literature on risk preferences of a representative bettor by including odds-dependent bet sizes in our estimations. Accounting for different bet sizes largely reduces the standard errors of all coefficients. Substituting the coefficients from the model with equal bet sizes into the model with odds-dependent sizes leads to a sharp decline in the likelihood which shows that accounting for different amounts is important. Our estimations strongly reject the hypothesis that the overbetting of outcomes with low probabilities (favorite-longshot bias) can be explained by risk-seeking bettors. Depending on the exact specification within cumulative prospect theory, the data can best be described by an overweighting of small probabilities which is more pronounced in the gain domain. Models allowing for two parameters for probability weighting each in the gain- and in the loss domain are superior.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221715008954
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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 249 (2016)
    Issue (Month): 3 ()
    Pages: 1102-1112

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    Handle: RePEc:eee:ejores:v:249:y:2016:i:3:p:1102-1112
    DOI: 10.1016/j.ejor.2015.09.053
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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