Time is money: costing the impact of duration misperception in market prices

Tiejun Ma, Leilei Tang, Frank McGroarty, Ming Chien Sung, Johnnie E V Johnson

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

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.

LanguageEnglish
JournalEuropean Journal of Operational Research
Early online date29 Apr 2016
DOIs
Publication statusPublished - 1 Dec 2016

Fingerprint

Profitability
Percent
Statistics
Logit Model
Conditional Model
Algorithm Analysis
Survival Analysis
Discount
Financial Markets
Profit
Lifetime
Market
Money
Market price
Misperception
Costing
Predict
Prediction
Demonstrate
Financial markets

Keywords

  • cognitive bias
  • economics
  • forecasting
  • OR in sports
  • sports betting

Cite this

Ma, Tiejun ; Tang, Leilei ; McGroarty, Frank ; Sung, Ming Chien ; Johnson, Johnnie E V. / Time is money : costing the impact of duration misperception in market prices. In: European Journal of Operational Research. 2016.
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Time is money : costing the impact of duration misperception in market prices. / Ma, Tiejun; Tang, Leilei; McGroarty, Frank; Sung, Ming Chien; Johnson, Johnnie E V.

In: European Journal of Operational Research, 01.12.2016.

Research output: Contribution to journalArticle

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