Title: Risk zones and longshot bias: an exploratory analysis
Authors: Akhilesh Chandra, Ravi Krovi, Balaji Rajagopalan
Addresses: The University of Akron, 259 South Broadway Akron, OH 44325, USA. ' The University of Akron, 259 South Broadway Akron, OH 44325, USA. ' Department of Information Systems, Oakland University, 2200 N. Squirrel Road, Rochester, Michigan 48309-4401, USA
Abstract: This paper examines decision making in a special case of risk and uncertainty that is similar to pari-mutuel betting. Specifically, this paper examines following issues: the presence of a longshot bias; the strategies participants adopt in making a priori selections; the effect of these strategies on total payoff; and the association of these strategies with participants| demographics. By examining decision strategies, the paper provides evidence of a longshot bias – participants bet on underdogs with an expectation to win big although in reality such a strategy usually correlates with lower total returns. The paper also shows the presence of risk zone where risky strategies significantly lower total returns. Interestingly, participants in the risk zone tend to bet more on longshots than on favourites. The paper offers economic explanations for the observed longshot bias in office pools and possible resolutions to mitigate this bias.
Keywords: risk zones; uncertainty; longshot bias; decision making; pari-mutuel betting; demographics; strategies; a priori selections; underdogs; office pools.
International Journal of Applied Decision Sciences, 2010 Vol.3 No.2, pp.91 - 116
Published online: 24 Aug 2010 *Full-text access for editors Access for subscribers Purchase this article Comment on this article