The utility of gambling and the favourite-longshot bias

Michael Cain and David Peel

The European Journal of Finance, 2004, vol. 10, issue 5, 379-390

Abstract: The traditional explanation for the usual favourite-longshot bias in gambling is that gamblers are risk-lovers. Conditions are derived under which the bias occurs and it is shown to be consistent with a utility function that has elasticity greater than one in a certain range. With a utility function that displays risk-aversion as well as risk-loving behaviour over its domain, it is demonstrated that the expected return-win probability frontier is not monotonic as has been hitherto tacitly assumed. This provides a consistent explanation for both the usual favourite-longshot bias and also for the few examples where a reverse bias has been observed. Pooled data supports the thesis that the frontier is not completely monotonic but does indeed have a turning point.

Keywords: betting markets; risk-return frontier; reverse bias (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (5)

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DOI: 10.1080/1351847042000199051

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