Betting market equilibrium with heterogeneous beliefs: A prospect theory-based model

The past several decades have witnessed a growing enthusiasm to implement the market as an information aggregation tool. However, some deep-rooted pricing anomalies frequently observed in various markets loom large, questioning the rationality of such eagerness. One of these anomalies is the favorite-longshot bias, and sometimes its opposite, the reverse favorite-longshot-bias. We propose an equilibrium model consisting of bettors with...