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Loss aversion and mental accounting: The favorite-longshot bias in parimutuel betting

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  • Jianying Qiu

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Abstract

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.

Suggested Citation

  • Jianying Qiu, 2009. "Loss aversion and mental accounting: The favorite-longshot bias in parimutuel betting," Working Papers 2009-15, Faculty of Economics and Statistics, University of Innsbruck.
  • Handle: RePEc:inn:wpaper:2009-15
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    References listed on IDEAS

    as
    1. 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.
    2. Frédéric 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.
    3. 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.
    4. 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.
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    More about this item

    Keywords

    loss aversion; mental accounting; parimutuel betting; the favorite-longshot bias.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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