The Longshot Bias is a Context Effect
42 Pages Posted: 6 Jul 2022
Date Written: June 7, 2022
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: Suggested Citation