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Loss aversion and mental accounting: The favorite-longshot bias in parimutuel betting

Jianying Qiu

Working Papers from Faculty of Economics and Statistics, Universität Innsbruck

Abstract: In this paper it is shown that the combination of mental accounting and loss aversion can fundamentally changes people's way of evaluating risky alternatives. The observation is applied in a market setting: Parimutuel betting markets. In parimutuel betting markets it has been found that for horses with lowest odds (favorites), market estimates of winning probabilities are smaller than objective winning probabilities; for horses with highest odds (longshot) the opposite is observed (the favorite-longshot bias). I build a game theoretical model and show that the favorite-longshot bias is the equilibrium play of the players with loss aversion, and that the degree of the favorite-longshot bias depends on the mental accounting process the players use.

Keywords: loss aversion; mental accounting; parimutuel betting; the favorite-longshot bias. (search for similar items in EconPapers)
JEL-codes: C72 D40 D81 G10 (search for similar items in EconPapers)
Pages: 25
Date: 2009-05
New Economics Papers: this item is included in nep-cbe and nep-upt
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https://www2.uibk.ac.at/downloads/c4041030/wpaper/2009-15.pdf (application/pdf)

Related works:
Working Paper: Loss aversion and mental accounting: the favorite longshot bias in parimutuel betting (2007) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:inn:wpaper:2009-15

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