First impressions, lack of judgement: Betting decisions are affected by uninformative racehorse names; betting returns on fast-sounding horses are lower compared to bets on other horses

Sonic Thunder vs. Brian the Snail. Are people affected by uninformative racehorse names? Oliver Merz, Raphael Flepp, Egon Franck. Journal of Behavioral and Experimental Economics, May 25 2021, 101724. https://doi.org/10.1016/j.socec.2021.101724

Highlights

• Betting decisions are affected by uninformative racehorse names.

• Winning probabilities of horses with fast-sounding names are overstated.

• Betting returns on fast-sounding horses are lower compared to bets on other horses.

• Affective betting decisions impair the betting market efficiency.

Abstract: This paper examines whether individuals’ decision making is affected by fast-sounding horse names in a betting exchange market environment. In horse racing, the name of a horse does not depend on the horse's performance and is thus uninformative. If positive affect towards fast-sounding horse names is present, we expect less accurate prices, i.e., winning probabilities and lower returns due to the increased demand for these bets. Using over 3 million horse bets, we find evidence that the winning probabilities of bets on horses with fast-sounding names are overstated, which impairs the prediction accuracy of such bets. This finding implies that prices in betting exchange markets are distorted by incorporating affective, misleading information from a horse's fast-sounding name. Consequently, this bias translates into significantly lower betting returns for horses with names classified as fast-sounding compared to the returns for all other horses.

Keywords: Affect heuristicDecision makingMarket efficiencyBetting marketHorse racing

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5. Conclusion

Our paper contributes to the understanding of the role affect plays in human decision making. We extend the previous literature by testing the external validity of the findings in laboratory experiments using the real-life setting of betting markets in which decisions have a substantial financial impact. Moreover, this setting allows a clean investigation of biases in betting prices, avoiding the well-known problem of unknown fundamental values prevalent in traditional financial markets. Overall, our findings suggest that betting prices are biased due to people's positive affective feelings towards fast-sounding horses. Consequently, betting returns on horses with fast-sounding names are systematically lower than the returns on all other horses. This result suggests that bettors should avoid jumping on the bandwagon when many other bettors are tempted to base their investment decisions on irrelevant factors and instead be aware of the potential mispricing of such bets.

While the prohibition of certain horse names might seem to be a first approach to correct the suboptimal decisions caused by affective feelings in our setting, the implementation of this kind of regulation in practice would cause both significant transaction costs and severe limitations on freedom. Even if we abstracted from the second point, the definition, validation, permanent adaptation and implementation of a “list of affect-enhancing horse names” would be a giant task. Further, even if this regulatory strategy somehow worked, it would just contribute to a solution in horse-betting, which is a relatively small field of the entire economy. Therefore, this regulatory strategy cannot serve as a remedy for the general problem that affective feelings towards objectively irrelevant attributes presumably distort decisions in other areas of the economy.

Awareness-raising strategies seem to be a more promising avenue to deal with affect in decision-making, according to psychology and neuroscience research stating that managing affect requires constant awareness of it (Peterson, 2007). Our article increases this awareness by clearly showing that affect plays a role in a real-life setting. This raises the question of whether affective feelings towards certain objectively irrelevant attributes might be even more prevalent in society than anticipated so far. Affective reactions presumably are not limited to suboptimal decisions in laboratory experiments or people's decisions in private life, such as excessive shopping or smoking, but might also impact large-scale areas starting from inefficient betting market prices to bubbles in stock markets to outcomes of political elections. The more research shows that affect leads to suboptimal decisions in a variety of areas, the greater the awareness of this phenomenon will be.

Additional field-specific regulations aiming to raise awareness among relevant decision-makers must be built on further research. So far, it remains unclear which measures – e.g., warnings that bettors would have to read or declarations that bettors would have to sign before placing their bets – could lead to increased self-monitoring and reduce the impact of affect in the horse-betting context in our paper.