Heterogeneity in Risk Preferences: Evidence from a Real-World Betting Market

40 Pages Posted: 26 Mar 2013 Last revised: 6 Dec 2019

Date Written: December 5, 2019


We develop a structural model of behavior that accounts for rich heterogeneity in individuals' risk preferences, and we estimate it using a panel dataset of individual activity in a sports wagering market. The number and variety of lottery choices we observe enables us to distinguish the key features of prospect theory — value-function curvature, loss aversion, and probability weighting. Our Bayesian hierarchical mixture model enables us to estimate the proportion of distinct utility `types' characterized by the different prospect theory features, and thus to evaluate their relative prevalence in the population. We find that utility curvature alone does not explain the choices we observe and that, while loss aversion is important, probability weighting is the most prevalent behavioral feature of risk attitudes: Two-thirds of individuals exhibit loss aversion, but all exhibit probability weighting.

Keywords: Risk Preferences, Prospect Theory, Loss Aversion, Probability Weighting, Discrete Choice, Mixture Model, Hierarchical Model, Bayesian Estimation

JEL Classification: D01, D03, D12, D81, G11, L83

Suggested Citation

Andrikogiannopoulou, Angie and Papakonstantinou, Filippos, Heterogeneity in Risk Preferences: Evidence from a Real-World Betting Market (December 5, 2019). Swiss Finance Institute Research Paper No. 13-53, Available at SSRN: https://ssrn.com/abstract=2239194 or http://dx.doi.org/10.2139/ssrn.2239194

Angie Andrikogiannopoulou (Contact Author)

King's College London

London, WC2R 2LS
United Kingdom

Filippos Papakonstantinou

King's College London

London, England WC2R 2LS
United Kingdom

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