Inferring Risk Preferences Using Synthetic Win Bets in Horse Betting 'Exotic' Markets
44 Pages Posted: 13 Dec 2006
Date Written: December 2006
Risk preferences are inferred using a naturally occurring lottery: a synthetic win bet in exotic horse bets (exacta, trifecta, and superfecta). Unlike ordinary win bets, synthetic win bets do not have co-increasing standard deviation and skewness, and some synthetic win bets do not exhibit favorite-longshot bias. A co-efficient of relative risk aversion for a "standardized" utility function of up to 3 is estimated. The synthetic win market dislikes standard deviation and kurtosis (and other higher-order even moments) and likes skewness (and other higher order odd moments), implying participants are not risk-loving as some previous research has claimed. Including higher-order moments strongly affects the magnitude of utility function estimates.
Keywords: utility, risk preferences, favorite-longshot bias, gambling
JEL Classification: D81, G12
Suggested Citation: Suggested Citation