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Examining Explanations of a Market Anomaly: Preferences or Perceptions?

Snowberg, Erik and Wolfers, Justin (2008) Examining Explanations of a Market Anomaly: Preferences or Perceptions? In: Handbook of Sports and Lottery Markets. Elsevier , Amsterdam, pp. 103-136. ISBN 978-0-444-50744-0.

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This paper compiles and summarizes the theoretical literature on the favorite-longshot bias, an anomaly that has been found in sports betting markets for over half a century. Explanations of this anomaly can be broken down into two broad categories, those involving preferences and those involving perceptions. We propose a novel test of these two classes of models that allows us to discriminate between them without parametric assumptions. We execute these tests on a new dataset, which is an order of magnitude larger than any used in previous studies, and conclude that the perceptions model, in which bettors overestimate the chances of small probability events, provides a better fit to the data.

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Additional Information:© 2008 Elsevier B.V. We would like to thank David Siegel of Trackmaster for supplying the data, and Scott Hereld and Ravi Pillai for their valuable assistance in managing the data. Betsey Stevenson, Matthew White, and William Ziemba provided valuable insights. Later sections of this article draw heavily from our paper “The Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?”
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:31791
Deposited By: Tony Diaz
Deposited On:04 Jun 2012 23:01
Last Modified:09 Nov 2021 20:00

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