A dual theory approach to estimating risk preferences in the parimutuel betting market

Niko Suhonen, Jani Saastamoinen () and Mika Linden
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Niko Suhonen: University of Eastern Finland Business School
Jani Saastamoinen: University of Eastern Finland Business School
Mika Linden: University of Eastern Finland

Empirical Economics, 2018, vol. 54, issue 3, No 18, 1335-1351

Abstract: Abstract This paper introduces an alternative empirical approach to estimating risk preferences in the parimutuel betting market using a dual theory model which is amended to include bettors’ misperceptions of probabilities. We replicate previous empirical results and test our alternative empirical approach using parimutuel horse race betting data. Our results suggest that while bettors are risk-averse, they are also prone to misperceiving probabilities by overweighting low probabilities and underweighting high probabilities. As an application, these results replicate the choice patterns consistent with the Allais paradox.

Keywords: Allais paradox; Dual theory; Probability weighting function; Rank-dependent utility (search for similar items in EconPapers)
JEL-codes: D81 L83 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00181-017-1258-x

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