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Cited by 44Decision-Making and Behavioral EconomicsSports Analytics and PerformanceFinancial Markets and Investment Strategies

Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?

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Snowberg, Erik, Wolfers, Justin·2010·National Bureau of Economic Research
DOI 10.3386/w15923
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Abstract

The favorite-longshot bias describes the longstanding empirical regularity that betting odds provide biased estimates of the probability of a horse winning-longshots are overbet, while favorites are underbet.Neoclassical explanations of this phenomenon focus on rational gamblers who overbet longshots due to risk-love.The competing behavioral explanations emphasize the role of misperceptions of probabilities.We provide novel empirical tests that can discriminate between these competing theories by assessing whether the models that explain gamblers' choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including compound bets in the exacta, quinella or trifecta pools.Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory.

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Cited by

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Authors
Snowberg, E., & Wolfers, J.
Affiliations
California Institute of Technology (US)
ORCID
Wolfers, Justin
Venue
National Bureau of Economic Research
Publisher
National Bureau of Economic Research
Published
2010-04
DOI
10.3386/w15923
OpenAlex
W2890964812
Cited by
44
References
3
Citations by year
2023: 3 · 2022: 1 · 2021: 1 · 2020: 1 · 2019: 1 · 2017: 2 · 2016: 2 · 2015: 5 · 2014: 2 · 2013: 3 · 2012: 7
Type
report
Language
en
Open access
Locations
National Bureau of Economic Research (publishedVersion)
Funders
  • Microsoft Research
  • Stanford Institute for Economic Policy Research
Topics
  • Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
  • Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Sports Analytics and Performance
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
Keywords
favorite-longshot bias, horse racing betting, betting odds, prospect theory

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