Are Behavioral Biases Stable Across Markets and Prevalent Across Individuals? Evidence from Individual Betting Choices OR from SSRN: Individual Reaction to Past Performance Sequences: Evidence from a Real Marketplace

We use a unique panel dataset of individual activity in a soccer wagering market, to study the extent to which individuals’ betting behavior is affected by biases such as the representativeness bias, the limited-attention bias, and the home/local bias. Sports betting markets provide a real-world empirical setting with many similarities with traditional financial markets but with experimental-like features. The study of this alternative market enables us to test whether the documented biases are stable across markets, and to better disentangle rational versus behavioral explanations of observed behavior through direct tests of market efficiency and portfolio performance. In addition, our long panel dataset renders an individual-level analysis of behavior possible, hence enables us to study the prevalence of these biases in the cross-section. We find that participants in the soccer wagering market adhere to the same heuristics as investors in the stock market, as patterns in team past performance, team popularity, and team location significantly affect individual bet selection and portfolio weighting decisions. Furthermore, we find that none of the sentiment variables contains information about match outcomes that is not reflected in the quoted prices, and that individuals do not earn significantly higher returns from betting on teams on long winning streaks, on popular teams, or on domestic/local teams. This evidence indicates that the observed behavior is not driven by superior information but rather by sentiment, and could provide useful insights about the sources of analogous biases in the stock market, where tests of efficiency and superior performance are not as clean. The individual-level analysis shows that the local bias is less evident across individuals relative to the other biases, and that while these biases affect most individuals’ bet selection decision, they are not prevalent across individuals in the portfolio weighting decision. OR from SSRN: We use novel data on individual activity in a sports betting market to study the effect of past performance sequences on individual behavior in a real market. The revelation of fundamental values in this market enables us to disentangle whether behavior is caused by sentiment or by superior information about market mispricings, hence to cleanly test in a real setting two sentiment-based theories of momentum and reversals — the regime-shifting model of Barberis, Shleifer, and Vishny (1998) and the gambler's/hot-hand fallacy model of Rabin (2002). Furthermore, our long panel allows us to calculate the proportions of individuals who exhibit each type of behavior. We find that i) three quarters of individuals exhibit trend-chasing behavior; ii) seven times as many individuals exhibit behavior consistent with Barberis, Shleifer, and Vishny (1998) as exhibit behavior consistent with Rabin (2002); and iii) no individuals earn superior returns from momentum trading.