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From aggregate betting data to individual risk preferences

Author

Listed:
  • Pierre-Andre Chiappori

    (Department of Economics - Universität Mannheim [Mannheim])

  • Bernard Salanie

    (Department of Economics - Universität Mannheim [Mannheim])

  • Francois Salanie

    () (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

  • Amit Gandhi

    (Department of Economics - Universität Mannheim [Mannheim])

Abstract

We show that even in the absence of data on individual decisions, the distribution of individual attitudes towards risk can be identified from the aggregate conditions that characterize equilibrium on markets for risky assets. Taking parimutuel horse races as a textbook model of contingent markets, we allow for heterogeneous bettors with very general risk preferences, including non-expected utility. Under a standard single-crossing condition on preferences, we identify the distribution of preferences among the population of bettors and we derive testable implications. We estimate the model on data from U.S. races. Specifications based on expected utility fit the data very poorly. Our results stress the crucial importance of nonlinear probability weighting. They also suggest that several dimensions of heterogeneity may be at work.

Suggested Citation

  • Pierre-Andre Chiappori & Bernard Salanie & Francois Salanie & Amit Gandhi, 2019. "From aggregate betting data to individual risk preferences," Post-Print hal-02121859, HAL.
  • Handle: RePEc:hal:journl:hal-02121859
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-02121859
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    1. repec:eee:ejores:v:270:y:2018:i:2:p:556-569 is not listed on IDEAS
    2. Keith Marzilli Ericson & Philipp Kircher & Johannes Spinnewijn & Amanda Starc, 2015. "Inferring Risk Perceptions and Preferences using Choice from Insurance Menus: Theory and Evidence," NBER Working Papers 21797, National Bureau of Economic Research, Inc.
    3. Levon Barseghyan & Maura Coughlin & Francesca Molinari & Joshua C. Teitelbaum, 2019. "Heterogeneous Choice Sets and Preferences," Papers 1907.02337, arXiv.org.
    4. Nikhil Agarwal & Paulo Somaini, 2018. "Demand Analysis Using Strategic Reports: An Application to a School Choice Mechanism," Econometrica, Econometric Society, vol. 86(2), pages 391-444, March.
    5. Tyler Abbot, 2017. "General Equilibrium Under Convex Portfolio Constraints and Heterogeneous Risk Preferences," Papers 1706.05877, arXiv.org, revised Jun 2018.

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    Keywords

    Identification; revealed preferences; attitudes towards risk;

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