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[Research]Misunderstanding of the binomial distribution, market inefficiency, and learning behavior: Evidence
2015.05.01 Views 657 경영학연구분석센터
European Journal of Operational Research
Volume 243, Issue 1, 16 May 2015, Pages 333–344
Joon Ho Hwang, , Min-Su Kim
Korea University Business School, Anam-dong, Seongbuk-gu, Seoul 136-701, Republic of Korea
http://www.sciencedirect.com/science/article/pii/S0377221714009825
Abstract
This paper uses the setting of a volleyball game and an exotic sports betting on the point difference of volleyball games to test whether people correctly understand the probabilities related to outcomes of a process which follows a binomial distribution. We find that people consistently underestimate the probabilities of outcomes that correspond to extreme ends of the distribution. This is consistent with the extremeness aversion bias documented in decision making studies. Whereas previous studies on the extremeness aversion bias find the existence of the bias in a consumer choice setting, we document that this bias also exists in an investment setting. We find evidence of learning behavior over time; however, it is not sufficient to eliminate the bias.
Keywords
Economics; Binomial distribution; Learning behavior; Cognitive bias; Sports betting
Volume 243, Issue 1, 16 May 2015, Pages 333–344
Joon Ho Hwang, , Min-Su Kim
Korea University Business School, Anam-dong, Seongbuk-gu, Seoul 136-701, Republic of Korea
http://www.sciencedirect.com/science/article/pii/S0377221714009825
Abstract
This paper uses the setting of a volleyball game and an exotic sports betting on the point difference of volleyball games to test whether people correctly understand the probabilities related to outcomes of a process which follows a binomial distribution. We find that people consistently underestimate the probabilities of outcomes that correspond to extreme ends of the distribution. This is consistent with the extremeness aversion bias documented in decision making studies. Whereas previous studies on the extremeness aversion bias find the existence of the bias in a consumer choice setting, we document that this bias also exists in an investment setting. We find evidence of learning behavior over time; however, it is not sufficient to eliminate the bias.
Keywords
Economics; Binomial distribution; Learning behavior; Cognitive bias; Sports betting