Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73540
Authors: 
Qiu, Jianying
Year of Publication: 
2009
Series/Report no.: 
Working Papers in Economics and Statistics 2009-15
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.
Subjects: 
loss aversion
mental accounting
parimutuel betting
the favorite-longshot bias.
JEL: 
C72
D40
D81
G10
Document Type: 
Working Paper

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