Betting market equilibrium with heterogeneous beliefs: A prospect theory-based model

Dian Yu, Jianjun Gao and Tongyao Wang

European Journal of Operational Research, 2022, vol. 298, issue 1, 137-151

Abstract: The past several decades have witnessed a growing enthusiasm to implement the market as an information aggregation tool. However, some deep-rooted pricing anomalies frequently observed in various markets loom large, questioning the rationality of such eagerness. One of these anomalies is the favorite-longshot bias, and sometimes its opposite, the reverse favorite-longshot-bias. We propose an equilibrium model consisting of bettors with cumulative prospect theory-based utility and heterogeneous beliefs to explain these two anomalies in a unified framework. Unlike existing results that mostly focus on one aspect of the underlying model, our model enables us to isolate and analyze the impacts of probability weighting, loss aversion, belief concentration, and belief tailedness. We show how these parameters jointly determine the properties of the equilibrium price. Empirical results also suggest this model has adequate flexibility to explain the behavior of actual historical data.

Keywords: Forecasting; Belief aggregation; Betting market; Prospect theory; Equilibrium price (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221721004525
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:298:y:2022:i:1:p:137-151

DOI: 10.1016/j.ejor.2021.05.024

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().