Bettors Love Skewness, Not Risk, at the Horse Track
Journal of Political Economy Vol 106, No 1, February 1998
Posted: 11 Feb 1998
Studies of horse race betting have empirically established a longshot anomaly; that is, low-probability, high-variance bets (longshots) provide low mean returns and high-probability, low-variance bets provide relatively high mean returns. Because bettors willingly accept low-return, high-variance bets, researchers conclude that bettors are risk lovers. In this study, we show that the data are at least as consistent with risk aversion as they are with risk loving when one explicitly considers the skewness of bet returns. Because the variance and skewness of bet returns are highly correlated, bettors may appear to prefer variance when it is skewness that they crave.
JEL Classification: D81, G12
Suggested Citation: Suggested Citation