Modeling Preference Heterogeneity Within and Across Behavioral Types: Evidence from a Real-world Betting Market
38 Pages Posted: 26 Mar 2013 Last revised: 25 Oct 2021
Date Written: October 21, 2021
Abstract
While it is commonly accepted that risk preferences differ across individuals, studies that estimate them typically allow for limited heterogeneity. We develop a methodology that allows for richer representation of heterogeneity both within and across utility types characterized by different behavioral features. This enables us to improve individual- and population-level estimates, and to assess the relative importance of loss aversion and probability weighting, and their prevalence in the population. Applying our model to individual sports-betting choices, we find that utility curvature alone does not explain observed choices and, while two-thirds of individuals exhibit loss aversion, all exhibit probability weighting.
Keywords: Risk Preferences, Prospect Theory, Loss Aversion, Probability Weighting, Discrete Choice, Mixture Model, Hierarchical Model, Bayesian Estimation
JEL Classification: D90, C11, C51, D81, D12, L83
Suggested Citation: Suggested Citation
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