Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?

Justin Wolfers and Erik Snowberg

No 7801, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The favorite-longshot bias describes the longstanding empirical regularity that betting odds provide biased estimates of the probability of a horse winning?longshots are overbet, while favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet longshots due to risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel empirical tests that can discriminate between these competing theories by assessing whether the models that explain gamblers? choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including compound bets in the exacta, quinella or trifecta pools. Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory.

Keywords: Compound lotteries; Favorite-longshot bias; Pricing under risk; Probability weighting (search for similar items in EconPapers)
JEL-codes: D03 D49 G12 L83 (search for similar items in EconPapers)
Date: 2010-05
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Citations: View citations in EconPapers (110)

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Related works:
Journal Article: Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions? (2010)
Working Paper: Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? (2010)
Working Paper: Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? (2010)
Working Paper: Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? (2010)
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