Risk zones and longshot bias: an exploratory analysis

This paper examines decision making in a special case of risk and uncertainty that is similar to pari-mutuel betting. Specifically, this paper examines following issues: the presence of a longshot bias; the strategies participants adopt in making a priori selections; the effect of these strategies on total payoff; and the association of these strategies with participants' demographics. By examining decision strategies, the paper provides evidence of a longshot bias – participants bet on underdogs with an expectation to win big although in reality such a strategy usually correlates with lower total returns. The paper also shows the presence of risk zone where risky strategies significantly lower total returns. Interestingly, participants in the risk zone tend to bet more on longshots than on favourites. The paper offers economic explanations for the observed longshot bias in office pools and possible resolutions to mitigate this bias.