The Longshot Bias is a Context Effect

42 Pages Posted: 6 Jul 2022

See all articles by Andrew Meyer

Andrew Meyer

University of Pennsylvania - Department of Psychology

C. Sean Hundtofte

NYU Stern

Date Written: June 7, 2022

Abstract

In nearly every betting market, gamblers overvalue the riskiest bets. This “longshot bias” is usually explained by a tendency to over-weight low probability events. We offer a novel explanation: contrast effects enhance the attractiveness of longshots because gambles presented in terms of their payoffs are easier to compare along the payoff dimension than along the probability dimension. Our analysis of historical betting odds suggests that contrasts between gamble payoffs can explain the longshot bias. Laboratory experiments confirm those contrast effects and show that the longshot bias disappears when gamblers consider bets in isolation or when winning probabilities are easier to compare.

Keywords: Risk preference, context effects

JEL Classification: D81, D03

Suggested Citation

Meyer, Andrew and Hundtofte, C. Sean, The Longshot Bias is a Context Effect (June 7, 2022). Available at SSRN: https://ssrn.com/abstract=4130363 or http://dx.doi.org/10.2139/ssrn.4130363

Andrew Meyer (Contact Author)

University of Pennsylvania - Department of Psychology ( email )

United States

C. Sean Hundtofte

NYU Stern ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://www.seanhundtofte.com

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