Explaining the Favorite–Long Shot Bias: Is it Risk-Love or Misperceptions?

The favorite–long shot bias describes the long-standing empirical regularity that betting odds provide biased estimates of the probability of a horse winning: long shots are overbet whereas favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet long shots because of risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel...