A dual theory approach to estimating risk preferences in the parimutuel betting market

Abstract

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.