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

Snowberg, Erik and Wolfers, Justin (2010) Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? Journal of Political Economy, 118 (4). pp. 723-746. ISSN 0022-3808.

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The favorite–long shot bias describes the long-standing empirical regularity that betting odds provide biased estimates of the probability of a horse winning: long shots are overbet whereas favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet long shots because of 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 data set ideally suited to implement these tests, we find evidence in favor of the view that misperceptions of probability drive the favorite–long shot bias, as suggested by prospect theory.

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Additional Information:© 2010 by The University of Chicago. We thank David Siegel of Equibase for supplying the data, and Scott Hereld and Ravi Pillai for their valuable assistance in managing the data. Jon Bendor, Bruno Jullien, Steven Levitt, Kevin Murphy, Marco Ottaviani, Bernard Salanié, Peter Norman Sørenson, Betsey Stevenson, Matthew White, William Ziemba, and an anonymous referee provided useful feedback, as did seminar audiences at Carnegie Mellon, Chicago Booth School of Business, Haas School of Business, Harvard Business School, University of Lausanne, Kellogg (Managerial Economics and Decision Sciences Department), University of Maryland, University of Michigan, and Wharton. Snowberg gratefully acknowledges the SIEPR Dissertation Fellowship through a grant to the Stanford Institute for Economic Policy Research. Wolfers gratefully acknowledges a Hirtle, Callaghan & Co.—Arthur D. Miltenberger Research Fellowship, and the support of the Zull/Lurie Real Estate Center, the Mack Center for Technological Innovation, and Microsoft Research.
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SIEPR Dissertation FellowshipUNSPECIFIED
Stanford Institute for Economic Policy ResearchUNSPECIFIED
Hirtle, Callaghan & Co. Arthur D. Miltenberger Research FellowshipUNSPECIFIED
Zull/Lurie Real Estate CenterUNSPECIFIED
Mack Center for Technological InnovationUNSPECIFIED
Microsoft ResearchUNSPECIFIED
Issue or Number:4
Record Number:CaltechAUTHORS:20120530-094648307
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:31703
Deposited By: Tony Diaz
Deposited On:08 Jun 2012 18:18
Last Modified:03 Oct 2019 03:54

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