Financial Instruments with Sports Betting Components: Marketing Gimmick or a Domain for Behavioral Finance?

Abstract:     
We examine theoretically and experimentally a certain class of new financial instruments which are designed as lotteries on the outcome of prominent sports events like the Soccer World Cup 2006. From a theoretical point of view, sports betting products may be superior to a fixed rate investment because of heterogeneous expectations, risk loving behavior of investors or additional non-monetary utility components. In comparison to the direct placement of bets at bookmakers, sports betting products may be preferable in cases of hedonic framing. Our experimental section, however, reveals the limited practical relevance of these theoretical arguments for "average" decision-makers. Despite this, financial instruments with sports betting components offer a certain profit potential due to the diversity of preferences across individuals. Summarizing, the issuance of sports betting products may actually be mainly driven by marketing aspects, though they may be considered "viable" niche products with low cost of capital for banks.

Number of Pages in PDF File: 51

Keywords: behavioral finance, financial engineering, sports betting, structured products

JEL Classification: G31, G32, G35

working papers series