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

Erik Snowberg and Justin Wolfers ()

No 15923, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D03 D49 G13 G14 L83 (search for similar items in EconPapers)
Date: 2010-04
Note: AP EFG IO
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Published as Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions?," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 723-746, 08.

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