The Longshot Bias Is a Context Effect

Andrew Meyer () and C. Hundtofte
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Andrew Meyer: Marketing Department, The Chinese University of Hong Kong Business School, Shatin, New Territories, Hong Kong; Pristine Infotech, Burlington, Massachusetts 01803

Management Science, 2023, vol. 69, issue 11, 6954-6968

Abstract: In nearly every betting market, gamblers overvalue the riskiest bets. This “longshot bias” is usually explained by a tendency to overweight low-probability events. We offer a novel explanation: contrast effects enhance the attractiveness of longshots because gambles presented in terms of their payoffs are easier to compare along the payoff dimension than along the probability dimension. Our analysis of historical betting odds suggests that contrasts between gamble payoffs can explain the longshot bias. Laboratory experiments confirm those contrast effects and show that the longshot bias disappears when gamblers consider bets in isolation or when winning probabilities are easier to compare.

Keywords: utility preference; decision analysis; risk; asset pricing; behavior and behavioral decision making (search for similar items in EconPapers)
Date: 2023
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