Loss aversion and mental accounting: The favorite-longshot bias in parimutuel betting
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.
|Date of creation:||May 2009|
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- 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.
- 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.
- Frédéric Koessler & Anthony Ziegelmeyer & Marie-Hélène Broihanne, 2003. "The Favorite-Longshot Bias in Sequential Parimutuel Betting with Non-Expected Utility Players," Theory and Decision, Springer, vol. 54(3), pages 231-248, May.
- FrÃ©dÃ©ric 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.
- Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Jena Economic Research Papers 2007-033, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- 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.
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