TY - JOUR
T1 - Time is money
T2 - costing the impact of duration misperception in market prices
AU - Ma, Tiejun
AU - Tang, Leilei
AU - McGroarty, Frank
AU - Sung, Ming Chien
AU - Johnson, Johnnie E V
PY - 2016/12/1
Y1 - 2016/12/1
N2 - We explore whether, and to what extent, traders in a real world financial market, where participants' judgements are reportedly well calibrated, are subject to duration misperception. To achieve this, we examine duration misperception in the horserace betting market. We develop a two-stage algorithm to predict horses' winning probabilities that account for a duration-related factor that is known to affect horses' winning prospects. The algorithm adapts survival analysis and combines it with the conditional logit model. Using a dataset of 4736 horseraces and the lifetime career statistics of the 53,295 horses running in these races, we demonstrate that prices fail to discount fully information related to duration since a horse's last win. We show that this failure is extremely costly, since a betting strategy based on the predictions arising from the model shows substantial profits (932.5 percent and 16.27 percent, with and without reinvestment of winnings, respectively). We discuss the important implications of duration neglect in the wider economy.
AB - We explore whether, and to what extent, traders in a real world financial market, where participants' judgements are reportedly well calibrated, are subject to duration misperception. To achieve this, we examine duration misperception in the horserace betting market. We develop a two-stage algorithm to predict horses' winning probabilities that account for a duration-related factor that is known to affect horses' winning prospects. The algorithm adapts survival analysis and combines it with the conditional logit model. Using a dataset of 4736 horseraces and the lifetime career statistics of the 53,295 horses running in these races, we demonstrate that prices fail to discount fully information related to duration since a horse's last win. We show that this failure is extremely costly, since a betting strategy based on the predictions arising from the model shows substantial profits (932.5 percent and 16.27 percent, with and without reinvestment of winnings, respectively). We discuss the important implications of duration neglect in the wider economy.
KW - cognitive bias
KW - economics
KW - forecasting
KW - OR in sports
KW - sports betting
UR - http://www.scopus.com/inward/record.url?scp=84969514519&partnerID=8YFLogxK
U2 - 10.1016/j.ejor.2016.04.044
DO - 10.1016/j.ejor.2016.04.044
M3 - Article
AN - SCOPUS:84969514519
SN - 0377-2217
VL - 255
SP - 397
EP - 410
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 2
ER -