Resource title

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

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Resource description

Parimutuel betting markets are simplified financial markets, and can thus provide a clearer view of pricing issues which are more complicated elsewhere. Though empirical studies generally conclude that the parimutuel betting markets are surprisingly efficient, it is also 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. This phenomenon, called the favorite longshot bias, has many explanations such as risk seeking preference, transaction costs, and non-linear transformation of probabilities into decision weights, etc. This paper combines loss aversion with mental accounting, and provides a new explanation for the favorite longshot bias. We show that the bias exists in the absence of all above mentioned reasons, and the degree of the bias differs depending on the type of the mental accounting process that bettors apply.

Resource author

Jianying Qiu

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/25591

Resource license

Adapt according to the presented license agreement and reference the original author.