Broihanne, Marie-Hélène <br/><br/>
The Favorite/Long-Shot Bias and the House Money Effect in an Experimental Parimutuel Betting Market 

 -  2005.<br/>							 
<br/><br/> 62 
<br/><br/> This article studies the favorite/long-shot bias and the house money effect in a simple parimutuel betting market experiment. Bettors sequentially bet on one of two alternatives in an exogenous order, and the expected return of each alternative depends on the betting shares and on the common prior probability that the alternative is the correct one. Two experiments are implemented in the laboratory. In the first one subjects bet money that comes from the experimenter, whereas in the second one they bet money previously acquired after some effort. We observe the favorite/long-shot bias in the 40 repetitions of the experimental betting market in both experiments. Aggregate behavior in the two experiments differs only in the first few repetitions. A rank dependent expected utility model with imperfect forecast explains the favorite/long-shot bias and individual behavior in both experiments.Classification JEL: C72, C92, D84.