A dual theory approach to estimating risk preferences in the parimutuel betting market
This paper introduces an alternative empirical approach to estimating risk preferences in the parimutuel betting market using a dual theory model which is amended to include bettors’ misperceptions of probabilities. We replicate previous empirical results and test our alternative empirical approach using parimutuel horse race betting data. Our results suggest that while bettors are risk-averse, they are also prone to misperceiving probabilities by overweighting low probabilities and underweighting high probabilities. As an application, these results replicate the choice patterns consistent with the Allais paradox.
KeywordsAllais paradox Dual theory Probability weighting function Rank-dependent utility
JEL ClassificationD81 L83
The authors wish to thank Thomas Epper, Helga Fehr-Duda, David Forrest, Timo Kuosmanen, Timo Tammi, Hannu Vartiainen, Horst Zank and the two anonymous reviewers for their helpful comments and suggestions. This research was supported by Emil Aaltonen Foundation, the Finnish Foundation for Alcohol Studies and the Finnish Foundation for Gaming Research.
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Conflicts of interest
The authors declare that they have no conflict of interest.
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