Inferring Risk Preferences Using Synthetic Win Bets in Horse Betting 'Exotic' Markets

44 Pages Posted: 13 Dec 2006

See all articles by Philip F. O'Connor

Philip F. O'Connor

University of Auckland - Department of Accounting and Finance; University of Waikato - Management School

Date Written: December 2006

Abstract

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

O'Connor, Philip F., Inferring Risk Preferences Using Synthetic Win Bets in Horse Betting 'Exotic' Markets (December 2006). Available at SSRN: https://ssrn.com/abstract=951071 or http://dx.doi.org/10.2139/ssrn.951071

Philip F. O'Connor (Contact Author)

University of Auckland - Department of Accounting and Finance ( email )

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Auckland 1001
New Zealand
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University of Waikato - Management School ( email )

Hamilton
New Zealand
+64 7 838 4466 (Phone)

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