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Phys Org

Phys Org

Sports betting and financial market data show how people misinterpret new information in predictable ways

Phys Org
Summary
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89% Informative

Study: People consistently overreact to weak information and underreact to strong information.

Eben Lazarus and his co-authors analyzed millions of betting transactions and prices on options contracts.

The study builds on decades of behavioral psychology and economics research about how people update their beliefs given new information.

It also connects to studies looking at how financial markets sometimes overreact and sometimes underreact.

Lazarus and his co-authors also tested their theory in a sophisticated financial market.

They found that early in games, events like scores created bigger shifts in betting odds than they should have.

Important events like fourth-quarter goals caused smaller shifts in the market than is justified.

Lazarus cautions that being aware of patterns does not remove all risk.