Journal of Banking & Finance 33 (2009) 2241–2252

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Journal of Banking & Finance

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Financial instruments with sports betting components: Marketing gimmick

or a domain for behavioral finance?
Wolfgang Breuer *, Guido Hauten, Claudia Kreuz
Department of Finance, RWTH Aachen University, Aachen, Germany

a r t i c l e i n f o a b s t r a c t

Article history: We examine theoretically and experimentally a certain class of new financial instruments which are
Received 1 May 2008 designed as lotteries on the outcome of prominent sports events like the Soccer World Cup 2006. From
Accepted 2 June 2009 a theoretical point of view, sports betting products may be superior to a fixed rate investment because of
Available online 6 June 2009
heterogeneous expectations, risk-loving behavior of investors or additional non-monetary utility compo-
nents. In comparison to the direct placement of bets at bookmakers’, sports betting products may be pref-
JEL classification: erable in cases of hedonic framing. Our experimental section, however, reveals the limited practical
G31
relevance of these theoretical arguments for ‘‘average” decision makers. Despite this, financial instru-
G32
G35
ments with sports betting components offer a certain profit potential due to the diversity of preferences
across individuals. Summarizing, the issuance of sports betting products may actually be mainly driven
Keywords: by marketing aspects, nevertheless sports betting products may be considered to be ‘‘viable” niche prod-
Behavioral finance ucts with low cost of capital for banks.
Financial engineering Ó 2009 Elsevier B.V. All rights reserved.
Sports betting
Structured products

1. Introduction specialized financial products, e.g. the European Soccer Champion-

What might a big sporting event such as the Soccer World Cup
in Germany have to do with a descriptive decision theory like the
prospect theory? At first glance, certainly very little; at second
glance, in fact, a great deal. Banks in particular are increasingly
using events of this kind for marketing campaigns, whereby the
spectrum involved ranges from the basic usage of the title of the
respective sporting event right up to the supplying of special finan-
cial instruments that are in one way or another connected to it.
With regard to the latter, two product varieties in particular
emerged during the course of the Soccer World Cup 2006 in
Germany. We shall refer to them here simply as ‘‘participatory prod-
ucts” and ‘‘sports betting products”. Such financial instruments are
by no means limited to the German capital market (see, e.g., De-
Jong, 2006, for Korea and Baumann, 2006, for Switzerland). For
simplicity reasons, however, we restrict our further exposition to
financial products of this kind that are issued on the German cap-
ital market, although our findings will be of general relevance.
Moreover, besides the Soccer World Cup, there are other big sport-
ing events which one can use as the starting point for the design of
* Corresponding author. Tel.: +49 241 80 93539; fax: +49 241 80 92163.
E-mail addresses: wolfgang.breuer@bfw.rwth-aachen.de (W. Breuer), guido.
hauten@bfw.rwth-aachen.de (G. Hauten), claudia.kreuz@bfw.rwth-aachen.de (C.
Kreuz).
ship (for the EURO 2008, see, e.g., Kramer, 2007; Schich, 2008).
However, as the general product design opportunities are always
the same, we adhere to the example of the Soccer World Cup
2006 as our reference case.
With regard to participatory products, these involve participa-
tion in the economic success of those companies which profit most
from the relevant sporting event; in this case, from the Soccer
World Cup. To this end, banks offer baskets of shares from suitable
companies in the form of funds or certificates. Examples of partic-
ipatory products are the Frankfurt Trust Fund’s ‘‘FT Big Sports”, the
WestLB Bank’s ‘‘WM-Select-Zertifikat 7/06” and the Commerz-
bank’s ‘‘Top 11 Zertifikat”. The sphere of selected companies varies
in accordance with who is offering the financial product, so that
sponsors and manufacturers of sports goods, but also construction
and travel companies, might be included in the basket of shares.
The creation of a portfolio of this kind is only sensible if the capital
market is not informationally efficient in the semi-strong sense. In
other words, commonly available information about the company
in question being in some way related to the sporting event under
consideration must not find its way directly into the share prices.
Generally speaking, it is highly unlikely that this condition will
be fulfilled, since an event like the Soccer World Cup could never
‘‘suddenly” materialize. We should expect that capital market par-
ticipants would adapt their supply and demand behavior compar-
atively well to sporting events and the yields therefrom for

0378-4266/$ - see front matter Ó 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.jbankfin.2009.06.001
2242 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252
particular firms. The resulting price effects imply that a special
portfolio selection strategy which focuses on shares of this kind
has little prospect of realizing positive excess returns.
The focus of our analysis will thus be on the second important
product variety linked to the Soccer World Cup: Sports betting prod-
ucts as a specific form of structured products (for recent studies on
other structured products see, e.g., Wilkens and Stoimenov, 2007;
Entrop et al., 2009). A key characteristic of sports betting products
is that the respective investors receive a rate of return which de-
pends on the outcome of the World Cup, whereby typically, it is
the performance of the German national soccer team that is para-
mount. On the one hand, this might simply be a marketing gimmick
(in fact, this perception actually seems to be the predominant one of
practitioners; see, e.g., Mildenberger, 2006; Weiss, 2006; or N.N.,
2006). On the other hand, the placement of this kind of instrument
may be understood as a (special, but nevertheless) ‘‘serious” form
of fund-raising – one which, naturally, has to be financially attractive
for the customer as lender and cost effective for the bank as bor-
rower. These two motivations are not mutually exclusive, since
the more successful the market placement of a finance instrument
of this kind, the more likely a positive marketing effect will be. Up
to now, the literature has failed to examine this ‘‘other” view in
any detail, and this paper intends to rectify this omission.
Unlike the case of conventional deposits with a fixed rate of
interest, with sports betting products there is the problem of an
additional source of risk in the determination of the rate of return,
which is practically independent of other cash flows for most
investors and also for the issuing bank. Thus, there is no room
for monetary hedging motives as a justification for the supply or
demand of the relevant financial instrument. Things may be differ-
ent if we take other utility generating sources than money into ac-
count. For example, individuals may utilize sports betting to hedge
the disappointment of an unsuccessful outcome of an event they
are emotionally attached to, such as the performance of the Ger-
man team in the Soccer World Cup. However, if we restrict our-
selves to situations where only money counts, then, as a
consequence, in the case of homogeneous, that is, identical expec-
tations of the investors and of the issuer of a sports betting prod-
uct, the latter’s expected rate of return cannot be attractive for
both contractual parties at the same time if a specific fixed interest
rate for the same maturity is available and all participants are risk-
neutral or risk-averse. Every time one of the two participants fa-
vors the sports betting product on account of its expected rate of
return over a fixed interest rate instrument, the other party will
take just the converse view. To sum up, then, there are only three
possible reasons for why a sports betting product can simulta-
neously be advantageous to a simple fixed rate investment in the
view of both lenders and borrowers: (1) different expectations
with regard to the probabilities of possible outcomes of a sports
event, which are relevant to the resulting contractual rate of inter-
est, (2) risk-seeking behavior of at least one of the participants, and
(3) other utility generating sources than money.
However, even in the light of these three reasons it remains un-
clear why sports betting products should be preferred to a simple
direct placement of bets at bookmakers’. In fact, in situations with
individuals having different mental monetary accounts at the same
time with integration and segregation among them, according to
certain so-called hedonic framing rules, there may be a relevant
difference between sports betting products and direct sports bets.
According to personal information supplied to the authors by
the sales director of a Sparkasse bank, the bank successfully sold
the ‘‘Sparkassen-KickTipp” (a sports betting product issued by
the Sparkasse banks) to private investors, but the overall issuance
amount was considerably lower than that of traditional fixed term
deposit offers during the respective time period. Although such a
statement is mere anecdotical evidence of a limited, though posi-
tive market success of these instruments, a more rigorous analysis
would certainly be preferable. As empirical data seems to be hard
to find, we want to address this issue by way of an experimental
design. By confronting 385 students of our university with differ-
ent decision situations, we have the opportunity to assess the
relevance of heterogeneous expectations, risk-loving behavior, non-
monetary utility components as well as hedonic framing. Since we
refer to cumulative prospect theory (CPT henceforth) as our refer-
ence for descriptive decision making, we are also able to contribute
to the growing literature that examines the practical relevance of
CPT in financial decision making (see, e.g., Erner et al., 2008).
Summarizing, we find that – compared to situations with
homogeneous expectations as a consequence of exogenously given
probabilities – heterogeneous expectations reduce the demand for
sports betting products because of ambiguity effects. Moreover, the
behavior of ‘‘average decision makers” according to CPT differs
considerably from the behavior that is actually observable. Non-
monetary utility components per se do not play a relevant role,
but there may be an indirect effect via influencing an investor’s
probability assessments.
Even without non-monetary utility aspects, with homogeneous
expectations being in effect and with CPT not being valid, a consid-
erable share of students acts in a risk-loving manner. Although, be-
cause of this diversity in preferences, sports betting products could
thus be viable even in the light of alternative fixed rate invest-
ments, they face the problem of competing with the direct place-
ment of bets, as aspects of hedonic framing do not seem to be
very important. Moreover, risk-loving behavior seems to be best
exploited by mimicking the direct placements of bets, e.g., through
simple binary lotteries, which are quite prone to misestimations of
success probabilities. With bookmakers having a comparative
advantage over banks in estimating the probabilities of potential
outcomes of sporting events, this problem certainly limits the po-
tential success of financial instruments with sports betting compo-
nents. Against this background, one may indeed consider these
instruments to be niche products that function as marketing gim-
micks, which explains their quite impressive presence in market-
ing campaigns, but at the same time – and to a limited degree –
they may also serve as serious financing means with lower cost
of capital than other financial sources.
The rest of the paper is organized as follows: In Section 2, we
give a more thorough description of sports betting products. In
Section 3, we present our theoretical analysis, while Section 4 is
devoted to the experimental verification of our hypotheses. Section
5 concludes.
2. Financial instruments with sports betting components
In general, sports betting products consist of two interest com-
ponents: One is a fixed base interest rate r and the other is an
uncertain bonus payment b ~ P 0 that depends on the outcome of
a predefined sporting event. The various products differ in particu-
~ An example of a
lar with respect to the probability distribution of b.
financial product with a rate of return which depends on the suc-
cess of the German national soccer team, is that which was offered
by the Dresdner Bank: a money market account with a bonus of
0.75% p.a., should Germany win the World Cup title. Here, as with
other products, the maximum permissible investment amount was
restricted (to 20,000 €) and the time period for the potential bonus
interest payment was also limited (up to August 31, 2006). The
Postbank’s ‘‘Fifa WM 2006 Weltmeister Zertifikat” and the ‘‘DZ
11,0 Champion MaxiRend Tracker” not only both have unwieldy
names even for German speakers, they are also participatory prod-
ucts in the aforementioned sense and they both guaranteed extra
interest payments subject to the respective World Cup winner
 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252
2006. However, for further deliberations, the ‘‘Postbank Bonus Vol-
ltreffer” and the ‘‘Sparkassen-KickTipp” (SKT, henceforth) would
appear to be the most interesting. For the former, the Postbank
guaranteed a base rate of return of 1.75% p.a., with a 0.75% point
increase for every game won by the German team. A further
0.75% point increase in interest payments was also possible if a
German player were to become top goal scorer. Each customer
was able to invest 2500 €, 5000 €, 7500 €, or 10,000 €, and a maxi-
mum of 9999 contracts were sold. The maturity time of the extra
rate of return was set at July 17, 2006. The Postbank also offered
a ‘‘Bonus Volltreffer” at the 2004 European Soccer Championship,
and the SKT for the World Cup 2006 appears to have been modeled
on the former’s structural characteristics. The minimum invest-
ment amount for the SKT was 2500 €. At a minimum maturity time
of 12 months and a base rate of return of 1.50% p.a., a bonus pay-
ment was granted for the first 6 months, subject to the German
team’s success in the tournament. The SKT was available in two
varieties, both of which are described in Table 1. In this context,
we have already taken into account that the bonus payment was
only promised for six out of 12 months minimum maturity so that
the extra interest rate on a yearly basis is but half the value granted
for six months. In version A, interest rates are increasing, as the
German soccer team forges ahead in the tournament. In contrast,
version B offers the highest interest rates in the case of an early
failure of the German team.
The Sparkasse banks had already offered other products with
sports betting components. For example, in 2006, the ‘‘Sparkasse
KölnBonn” was offering investments with interest payments,
which were linked to the success of the German soccer team ‘‘1.
FC Köln” and the German basketball team ‘‘Telekom Baskets Bonn”.
Our further investigations, however, will be directed towards the
SKT, since it represents the most differentiated form of sports bet-
ting products.
3. The SKT, riskless investments, and the direct placements of
sports bets: theory
From an investor’s point of view, one at least has to compare the
SKT with a simple fixed interest rate investment and – as a pecu-
liarity of sports betting products – with the direct placement of
sports bets at bookmakers’. With regard to the first aspect, the Kre-
issparkasse Bautzen, for example, which decided to offer its cus-
tomers the SKT, was, at the same time, also offering its
customers an interest rate of 1.90% for a minimum investment of
5000 € and 2.15% for one of more than 10,000 € in a time deposit
with maturity of one year. Under the assumption of risk-neutral
behavior on the bank’s side, the SKT would only be an interesting
financing instrument for an expected interest rate smaller than
1.90% (or 2.15%). In contrast, investors will at least compare the
SKT with a simple time deposit investment at the Sparkasse bank
and – in the case of risk-averse behavior – only accept expected
rates greater than 1.90% (or 2.15%). In fact, this seems to be only
a rather careful estimation of necessary minimum expected rates
of return, as statistics of the Deutsche Bundesbank (the German
central bank) state an average interest rate for households’ time
deposits with an agreed maturity of up to one year of 2.29% in
Table 1
Conditions for the SKT and odds offered by ‘‘Betandwin” (valid on March 31, 2006) according to the stage reached by the German team in the Soccer World Cup 2006.
(1) Stage reached First-round knockout Round of 16 knockout
(2) Version A (%) 1.50 1.625
(3) Version B (%) 2.50 2.00
(4) Odds 1:7 1:3.2
This table presents interest rates p.a. for both versions of the SKT and odds offered by the Internet bookmaker ‘‘Betandwin” on 03/31/2006 depending on the stage reached by
the German team in the Soccer World Cup 2006.
2243
March 2006 (see time series SUD 102 according to the Deutsche
Bundesbank, 2008). Apparently, the time deposit offer by the Kre-
issparkasse Bautzen is rather low, implying a reduced attractive-
ness of the SKT in comparison to an average time deposit in
March 2006. Investors who are willing to leave the Sparkasse Bank
as a customer may thus assume a higher interest rate than 1.90% or
2.15% for riskless time deposits.
Obviously, under such conditions, risk-averse investors will ac-
cept the SKT only in the case of heterogeneous expectations. The
SKT, version A, is of interest for such investors who believe quite
strongly in the success of the German soccer team, while investors
with more pessimistic assessments of the strength of the German
soccer team would prefer the SKT, version B. The SKT, versions A
and B, thus should be particularly interesting in a situation with
pronounced heterogeneous expectations. However, in such situa-
tions, there seems to be much uncertainty or ‘‘ambiguity” with re-
spect to the ‘‘true” values of the probabilities of future states of
nature. Therefore, ambiguity aversion, as introduced by Ellsberg
(1961), may become an issue and prevent investors from buying
the SKT to a large extent in situations with heterogeneous
expectations.
For homogeneous expectations and risk-averse behavior, the
SKT may be acceptable as a hedging device in situations with
non-monetary utility components. For supporters of the German
soccer team, in particular the SKT, version B, would offer monetary
compensations if the German soccer team drops out in an early
stage of the tournament, and thus offers some kind of insurance.
In contrast, from this point of view, a demand by German investors
for the SKT, version A, hardly seems to be justifiable. However, the
SKT, version A, offers high returns in cases where supporters of the
German team realize additional non-monetary utility components.
Unless these investors are able to separate these two aspects, they
may accept smaller expected rates of return for the SKT, version A,
than for the SKT, version B. To sum up, the influence of non-mon-
etary utility components on the attractiveness of sports betting
products is not unambiguous and needs further examination in
Section 4.
A third possible explanation for preferring sports betting prod-
ucts, although their expected rate of return is smaller than that
of a simple fixed interest rate investment, would be risk-loving
behavior on the investors’ side. In particular, CPT as developed
by Kahneman and Tversky (1979) and Tversky and Kahneman
(1992) implies an overweighting of small probabilities for extreme
outcomes, which may lead to risk-loving behavior.
As a peculiarity of sports betting products, it is generally possi-
ble to replicate them by placing bets at bookmakers’. For example,
Table 1 presents the odds for the German national team as offered
by the Internet bookmaker ‘‘Betandwin” on March 31, 2006.
Against this background, a potential investor planning to invest
10,000 € in the SKT, version A, can also achieve the same payment
consequences by, on the one hand, investing 10,0001.015/
1.019 = 9960.75 € at the fixed interest rate of 1.90% and addition-
ally placing suitable amounts on the German national soccer
team’s future performance. For instance, a stake of about 3.90 €
on Germany being knocked out in the round of 16 would, were it
to happen, bring in a win of 12.50 € – which would correspond
Quarter-finals knockout Semi-finals knockout Vice world champion World champion
1.75 1.875 2.00 2.50
1.875 1.75 1.625 1.50
1:3.6 1:4.75 1:10 1:9
2244 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252

to the respective bonus payment when holding the SKT. Analo-
gously, one could proceed likewise for the other potential results,
and it materializes that betting stakes totaling 34.84 € and, alto-
gether, an amount of (only) 9995.59 €, would suffice to replicate
the SKT, version A (see Table 2). Certainly, there are other possible
replicating strategies, but they all require lower levels of riskless
investments and higher betting stakes. Since, for a certain return
of 1 €, bets amounting to 1.1548 € have to be placed, the reproduc-
tion of the SKT will be least expensive when maximizing the uti-
lized amount of riskless investment. We do not consider
potential additional interest earnings arising from the intermedi-
ate investment of the betting profits here, but as they would not
be likely to exceed 1 €, we will not heed them in the following. It
is obvious that a fully rational investor will not accept the SKT in
version A for whatever the degree of risk aversion might be. For
reproducing version B, betting stakes of 46.85 € and a fixed term
deposit of 9960.75 € – in total 10,007.60 € are necessary (see once
again Table 2). This amount is higher than that for version A be-
cause the prospects of the German national team were – from
the viewpoint of 03/31/2006 – not particularly promising. How-
ever, even a small increase of the relevant riskless interest rate of
fixed investments to only 1.9778% would render replication less
expensive than a purchase of the SKT, version B. The direct place-
ment of sports bets thus seems to be another ‘‘serious” alternative
to investing in the SKT.
Nevertheless, even in situations with replicating costs below
10,000 €, the SKT in particular and sports betting products in gen-
eral may offer an advantage over the direct placements of bets to
make them sufficiently attractive. To be more specific, so-called
hedonic framing is important for both the sports betting products
and the corresponding replicating strategies. Thaler (1980) and
Tversky and Kahneman (1981) pointed out that decision makers
do not always regard simultaneously occurring income conse-
quences of an alternative in an aggregated (‘‘integrated”) manner
– such as would be expected with unlimited rationality. In con-
trast, it may be the case that a separate (‘‘segregated”) assessment
of the individual income consequences on different ‘‘mental ac-
counts” occurs. Following Thaler (1985, 1999) and with v() as an
individual’s subjective value function and Dx and Dy as two differ-
ent (riskless) monetary consequences (defined as changes in com-
parison to two separately considered initial wealth levels x and y),
both realized at the same time, the decision maker chooses be-
tween integration and segregation in such a way that the subjec-
tively highest possible value results:
v ðDx&DyÞ :¼ maxfv ðDx þ DyÞ; v ðDxÞ þ v ðDyÞg
For (plausible) value functions in line with CPT, it is well known
that segregation will pay when the overall outcome Dx + Dy consists
of two gains Dx > 0 and Dy > 0 and is always unfavorable for two po-
tential losses Dx < 0 and Dy < 0 because of the concavity of the value
function in the region of gains and its convexity in the region of
losses. Integration will also be favorable for a combination of rather
high gains and moderate losses. Breuer and Perst (2007) argue that
in the case of a combination of an uncertain outcome D~ x with possi-
ble realizations Dx1, Dx2, ... , DxN with a certain outcome Dy, hedonic
framing should be considered state-dependent, i.e., for each state of
nature, decision makers separately choose between segregation and
integration of Dxi (i = 1, . . . , N) and Dy. Under this assumption, it is
clear that both kinds of investments, the purchase of the SKT and
its replication through the direct placement of bets, become more
attractive in comparison to a (pure) fixed term deposit. However,
it is important to note that decision makers will assess a sports bet-
ting product not essentially in the same way, even with the same
payment consequences, as the corresponding replicating strategies,
because the type of mental accounting is not necessarily identical.
For the SKT, one mental account for the riskless base interest pay-
ment of 1.50% would be expected and a second one for the suc-
cess-related bonus payment, but the mental accounts for the
replicating strategy would arise from the fixed term deposit on the
one hand and from the income from the implemented sports bets
on the other. The first manner of mental accounting is relatively
more advantageous, since only gains are possible (implying utility
increasing segregations), as, in any case, there are only ‘‘bonus pay-
ments” in addition to the base interest rate. To be more precise, with
xinit as an individual’s initial wealth, for version A of the SKT we
would have Dy = xinit0.015, because this describes the interest gain
for an initial wealth (and thus reference point) xinit, and
Dxi 2 {0, xinit0.00125, xinit0.0025, xinit0.00375, xinit0.005, xinit0.01}
for these are the possible bonus payments. In fact, for sports betting
products with b ~ P 0 with certainty – as is the case with SKT – segre-
gation is optimal for all (here: six) possible states of nature under
consideration. Even a state-independent decision between segrega-
tion and integration would thus lead to the same subjective
valuation.
In the case of the replicating strategy, however, all values
of Dxi have to be reduced by the overall ‘‘investment” in sports
bets, which is sb = xinit(0.00125/3.2 + 0.0025/3.6 + 0.00375/4.75 +
0.005/10 + 0.01/9)  xinit0.0034856542, and hence implies losses
in comparison to the possible earnings from placing these bets in
the case of a first-round knockout, a knockout of the German team
in the round of 16, and a quarter-finals knockout. For these three
ð1Þ outcomes, state-dependent hedonic framing therefore only leads

Table 2
Replicating SKT (versions A and B).

Stage reached First-round Round of 16 Quarter-finals Semi-finals Vice World World

knockout knockout knockout knockout Champion champion
(1) SKT A (10,000 €) 10,150.00 € 10,162.50 € 10,175.00 € 10,187.50 € 10,200.00 € 10,250.00 €
(2) Income from riskless investment (9960.75 €) at 1.90% 10,150.00 € 10,150.00 € 10,150.00 € 10,150.00 € 10,150.00 € 10,150.00 €
(3) Necessary income from betting ((1)–(2)) 0.00 € 12.50 € 25.00 € 37.50 € 50.00 € 100.00 €
(4) Necessary amount of betting ((3) divided by the respective odds 0.00 € 3.90 € 6.94 € 7.89 € 5.00 € 11.11 €
according to row 4 of Table 1)
(5) Total amount of betting (sum of (4)) 34.84 €
(6) SKT B (10,000 €) 10,250.00 € 10,200.00 € 10,187.50 € 10,175.00 € 10,162.50 € 10,150.00 €
(7) Income from riskless investment (9960.75 €) at 1.90% 10,150.00 € 10,150.00 € 10,150.00 € 10,150.00 € 10,150.00 € 10,150.00 €
(8) Necessary income from betting ((6)–(7)) 100.00 € 50.00 € 37.50 € 25.00 € 12.50 € 0.00 €
(9) Necessary amount of betting ((8) divided by the respective odds 14.29 € 15.62 € 10.42 € 5.26 € 1.25 € 0.00 €
according to row 4 of Table 1)
(10) Total amount of betting (sum of (9)) 46.85 €

One can replicate an investment of 10,000 € in the SKT, version A, by investing 9960.75 € at a riskless interest rate of 1.90% and additionally placing suitable bets on the
various possible outcomes of the Soccer World Cup 2006 for the German national team. In total, 9960.75 + 34.84 = 9995.59 € are needed. It is possible to apply the same
procedure to replicate the SKT, version B, incurring total costs of 9960.75 + 46.85 = 10,007.60 €.
 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252 2245

to integration instead of segregation, which makes replicating
strategies less attractive than the direct purchase of the SKT. The
same conclusion holds true in the case of state-independent hedo-
nic framing, as in this case resulting CPT values for replicating
strategies are typically even lower than in the case of state-depen-
dent hedonic framing. Moreover, in the case of hedonic framing, it
does not suffice to compare replicating costs with the investment
of 10,000 € in the SKT, as replicating costs below that amount do
not necessarily imply the superiority of a replicating strategy
(while it still holds true that replication strategies requiring more
than 10,000 € are in any case inferior). Therefore, in situations with
replicating costs smaller than 10,000 €, one has to take into ac-
count the overall CPT value from the replicating strategy and the
additional investment of the difference between the replicating
costs and the initial wealth of 10,000 €. For the replication strategy,
Dy thus changes to (xinitsb)0.019, as we have to assume a con-
stant given initial wealth, which is risklessly invested unless it is
needed for the placement of sports bets. It should be clear that
all these implications also hold true with respect to the SKT, ver-
sion B.
Summarizing, with the SKT (version A or version B), only favor-
able segregations are possible, whereas the perceived losses in the
case of the replicating strategy enforce the retention of integration
– as with the case of unlimited rationality – at least for some states
of nature, when applying state-dependent hedonic framing. In the
case of state-independent hedonic framing, the assumed state-
independent decision between integration and segregation typi-
cally implies even lower subjective valuations for the replication
strategy. Therefore, with hedonic framing, the SKT becomes more
interesting in comparison to a simple fixed term deposit and in
comparison to a direct placement of sports bets at bookmakers’.
This is the fourth general theoretical result regarding the attrac-
tiveness of sports betting products.
However, we have to concede that financial instruments like
the SKT may have at least two shortcomings in comparison to sim-
ple sports bets. As payments do not vary much across states, this
does not exploit the overweighting of small probabilities to the
same extent as in the case of simple binary bets on a certain event
like betting on ‘‘Germany will become Soccer World Champion
2006”. Therefore, in order to make sports betting products attrac-
tive, one may reduce the number of states with bonus payments,
but at the same time increase the bonus. We may call this a ‘‘bonus
payment upgrade”. A second shortcoming of sports betting prod-
ucts lies in their lack of flexibility. By placing bets at bookmakers’,
an individual is able to design payment structures according to his
or her specific preferences. This may imply some kind of control
illusion on the investor’s side (see for this term, e.g., Langer and
Roth, 1975) which makes sports bets particularly attractive.
Enhancing the flexibility of sports betting products regarding their
payment structure characteristics may thus increase their market
chances. We might call such measures ‘‘flexibility enhancements”.
The considerations of this section suggest that sports betting prod-
ucts under bounded investor rationality may indeed have a right to
exist, but that there may also be potentials to make them even
more attractive for investors. However, one should note that our
findings will not be restricted to the assessment of the SKT, but
they will be of relevance for the whole class of sports betting prod-
~ with b
ucts that offer an overall interest rate of the kind r þ b ~ being
dependent on the outcome of a sporting event. Nevertheless, as
empirical evidence regarding the real-life importance of such
financial instruments is rather scarce, we rely on an experimental
design to analyze the relevance of our theoretical considerations of
this section.
4. Experimental evidence
In order to assess whether the theoretical findings of the pre-
ceding section are actually relevant for real-life decision making
in retail banking, we perform a computer-based experiment with
385 students from different study programs at our university.
These students all have in common the fact that they have at-
tended the basic compulsory lecture ‘‘Capital Budgeting” and are
thus at best at the beginning of their studies in the field of finance.
Table 3 summarizes some general descriptive statistics. In particu-
lar, we ask all these students to tell us their age, the number of uni-
versity semesters already completed, their sex, their financial
knowledge and their interest in soccer (the latter two based on
several questions, the answers to which are transformed into a
number from 0 to 10). Moreover, as a consequence of some consis-
tency checks undertaken by asking the same questions twice in dif-
ferent parts of the questionnaire, we are compelled to eliminate 50

Table 3
Some descriptive statistics regarding the participants of the experiment.

Three hundred and eighty-five students are questioned regarding their preferences for several sports betting products. The answers of 50 students are excluded from the
analysis because of too pronounced inconsistencies. However, the sample with and without the exclusion of these 50 students exhibits almost identical characteristics.
a
‘‘Financial knowledge” is scaled to numbers between 0 and 10 and determined in the following way: We award up to 5 points for previous vocational training (depending
on the relationship of such to financial issues), 4 points for any other previous financial education and 1 point if financial decisions are mainly made on one’s own.
b
‘‘Interest in soccer” is scaled to numbers between 0 and 10 and determined in the following way: We award up to 6 points for the general interest in soccer (0 to 6 points,
multiplied by a number between 0.1 and 1, depending on the amount of time spent on soccer), up to 2.5 points, if the proband has a favorite team in the first German
soccer division (0 to 2.5 points, multiplied by a number between 0.1 and 1, depending on the amount of time spent on that team), 1 point for the possession of a season
ticket for that team, and 1 point if there has already been a registration at a sports betting company. With this distribution of points, the maximum value reached is 9.25
points, so we scale all numbers with a factor of 10/9.25 at the end.
2246 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252
students from our analysis whose answers cast some doubt upon
the seriousness of their participation, since quantitative deviations
in answers for the same questions are greater than 25%. However,
the sample after the elimination of these 50 students does not dif-
fer significantly from the sample before this adjustment.
We ask all the students to answer several questions with re-
spect to the desirability of certain financial instruments. In the first
part of our experiment (‘‘PART 1” in Table 4), we simply postulate
the existence of six (abstract) future states of nature with certain
exogenously given probabilities, as displayed in Table 4. In the sec-
ond part (‘‘PART 2” in Table 4), we interpret these future states of
nature as the possible outcomes of the first round (i.e. after seven-
teen matches for each of the eighteen teams) of the first German
soccer division (the ‘‘Bundesliga”) so that students are forced to
estimate subjective probabilities by themselves. We present stu-
dents’ average probability estimates for part 2 of our experiment
in Table 4. We introduce these two different settings to find out
whether ambiguity and/or differences in interest in soccer may
lead to different behavior in both decision situations.
For both parts of the experiment, students have to evaluate four
different financial instruments (cases 1–4 for a situation with exog-
enously given probabilities, cases 5–8 for a situation with subjec-
tively estimated probabilities). We start with the introduction of a
financial product that resembles the SKT, version A, as there are
six different states of nature with different rates of return. In case
5, we introduce this financial instrument as a so-called (fictitious)
‘‘Bundesliga-KickTipp” (‘‘BKT” henceforth), as it offers different
rates of return depending on the outcome of the first round of the
German first soccer division. In case 1, with abstract future states
of nature, we refrain from explicitly naming this instrument (as well
as the other three) in our questionnaire. Nevertheless, in the follow-
ing, for reasons of simplicity, we speak of the BKT for both cases 1
and 5. In our experiment, we present the overall payment structure
of the BKT in a disaggregated manner consisting of a base payment x
and state-dependent bonus payments b ~ in order to allow for
potential hedonic framing effects (see rows 1 and 5 of Table 4).
The second financial product we offer also consists of a state-
independent base payment x and additional state-dependent pay-
ments. In contrast to the BKT, we reduce all these state-dependent
payments by 34.20 € and, thus, there are three states which actu-
ally imply penalties for the investor (see rows 2 and 6 of Table
4). We present this financial product as a combination of a riskless
investment and the placement of bets at a fictitious bookmaker (as
‘‘real” odds are not available) for the situation with exogenous
probabilities (case 2) and subjectively estimated ones by the stu-
dents (case 6). Apparently, those bets may lead to additional losses
or gains. We fix the relevant odds (as displayed in the first line of
Table 4) in such a way that in the case of exogenous probabilities
about 1.15 € is necessary in order to generate 1 € certain income
from sports bets, as this relation held at the end of March 2006
for the odds offered by ‘‘Betandwin”, according to Section 3 of
our paper. For the situation with probability assessments by the
students, we keep these odds, since the probabilities of the first
part of our experiment are identical to our (i.e., the authors’)
subjective assessments of the outcome of the first round of the
Bundesliga. For both cases 2 and 6, in what follows, we simply
speak of a ‘‘replicating strategy” with respect to the BKT. By way
of these two cases, we want to examine the relevance of hedonic
framing, as a simple increase of x by 34.20 € in cases 2 and/or 6
would ceteris paribus merely replicate the overall payments
achievable by any BKT in cases 1 and/or 5.
The third financial product is a straightforward binary lottery
with an exogenous success probability of 24.04% in the situation
with given probabilities (case 3). In the second part of our
experiment, it is a bet on Bayern Munich (the most prominent
German soccer team) reaching the top of the Bundesliga after the
first round, i.e. becoming ‘‘Herbstmeister” (case 7). In both cases
we simply speak of a binary lottery (see rows 3 and 7 of Table 4)
and we take it into account in order to examine the welfare conse-
quence of bonus payment upgrades in comparison to the ‘‘original”
BKT.
Finally, we offer a fourth financial product consisting of 9715 €
riskless investment at 1.90% (in order to avoid too high possible
losses or gains for the students) plus 285 € at the students’ free dis-
posal for additional riskless investments at 1.90% or for placing
bets on the different states of nature (see rows 4 and 8 of Table
4). Once again, we formulate this decision problem for both exog-
enous probabilities (case 4) and subjectively estimated ones by the
students themselves (case 8). The consideration of these two cases
enables us to find out something about expected rates of return
when subjectively optimal payment structures are achievable.
Moreover, it is possible to analyze the relevance of flexibility
enhancements, as defined in the previous section.
In cases 1–3 and 5–7, we vary the corresponding base payment
x so that a student becomes indifferent between the financial
instrument under consideration and a riskless investment at an
interest rate of 1.90%. In cases 4 and 8, each student determines
the overall amount of his or her riskless investment and his or
her additional bets on the different states of nature with the help
of an Excel-like spreadsheet.
Our main interest is in the resulting overall required minimum
expected rates of return for the first three financial instruments in
each of the two different settings under consideration. Moreover,
with the help of cases 4 and 8, we want to find out which expected
rates of return are acceptable when decision makers are somewhat
freer in designing their payment structures. For the sake of simplic-
ity, we speak in all eight cases of ‘‘minimum required expected
rates of return”, although in cases 4 and 8, these are actually opti-
mal expected rates of return for the decision problems under
consideration.
We question 90 students (77 after elimination of students with
inconsistent answers) on the spot in a computer room of our uni-
versity, while the other 295 students (258 after the elimination of
students with inconsistent answers) take part online, working
from their personal computer at home. Participation in the exper-
iment is voluntary. We promise all students some bonus points for
their final exam when ‘‘seriously” answering the questions. We
point out to the participants that there are in general no correct
or wrong answers as long as the participants are truly trying to re-
veal their preferences, but that we would interpret greater incon-
sistencies as a potential lack of seriousness in answering the
questions.
Moreover, we additionally promise on-site participants some
monetary incentive of about 20 € on average, depending on the
‘‘success” of their investment strategy. We determine payments
by randomly selecting one of the financial instruments for which
a student has revealed his or her preferences. In the case of the
selection of one of the four financial products with payments
depending on the outcome of the German Bundesliga, we base
payoffs on the real results as available on December 14, 2008. With
a fictitious ‘‘initial wealth” of 10,000 €, for each 20 € of interest
payment from the respective financial instrument, a student gets
1 € ‘‘real” payoff. Moreover, there is a fixed payment per student
of 10 € in order to prevent students from ending up with a negative
overall income from their participation in the experiment. Our on-
line experiment took place from November 6 to November 8, 2008,
3.00 p.m., with six out of 17 matches for each team left before the
completion of the first round (the scores of the Bundesliga teams as
of 11/06/2008 are available as Table Ad1 from the authors on
request and were accessible to all students during the experiment).
The on-site experiment took place on November 8, 2008, from
10.00 a.m. to 2.00 p.m.
Table 4
Decision situations under consideration.

Six future states of nature with s1 (odds 1:6.5) s2 (odds 1:3.5) s3 (odds 1:3.6) s4 (odds 1:4.3) s5 (odds 1:8.9) s6 (odds 1:10.7)
. . . either . . .
Part 1
. . .exogenous probabilities. . .(cases 1–4) p1 = 0.1331 p2 = 0.2472 p3 = 0.2404 p4 = 0.2012 p5 = 0.0972 p6 = 0.0809
(1) ‘‘Bundesliga-KickTipp” (CASE 1) x € base interest payment and 0 € x € base interest x € base interest x € base interest x € base interest x € base interest
bonus payment and 12.5 € payment and 25 € bonus payment and 37.5 € payment and 50 € bonus payment and 100 €
bonus bonus bonus

W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252

(2) Given replication of BKT (CASE 2) x € base interest payment and 34.20 € x € base interest x € base interest x € base interest x € base interest x € base interest
penalty payment and 21.70 € payment and 9.20 € payment and 3.30 € payment and 15.80 € payment and 65.80 €
penalty penalty bonus bonus bonus
(3) Binary lottery (CASE 3) 0 € interest payment 0 € interest payment x € interest payment 0 € interest payment 0 € interest payment 0 € interest payment
(4) Free combination of riskless investment 9899.59 €, x € from riskless 9899.59 €, x € from 9899.59 €, x € from 9899.59 €, x € from 9899.59 €, x € from 9899.59 €, x € from
and betting (CASE 4) investment and x1 € from bets placed riskless investment and riskless investment and riskless investment and riskless investment and riskless investment and
on s1 x2 € from bets placed on x3 € from bets placed on x4 € from bets placed on x5 € from bets placed on x6 € from bets placed on
s2 s3 s4 s5 s6
. . .or. . .
Part 2
. . .a description as possible outcomes of the Other ‘‘Herbstmeister” (first round Bayer Leverkusen Bayern Munich TSG 1899 Hoffenheim Schalke 04 Hamburger SV
first round of the German Bundesliga champion) than Leverkusen, Munich, ‘‘Herbstmeister” ‘‘Herbstmeister” ‘‘Herbstmeister” ‘‘Herbstmeister” ‘‘Herbstmeister”
(probabilities estimated by students) (cases Hoffenheim, Schalke, and Hamburg
5–8)
avg. prob. assessment (cases 5–8) p1 = 0.0438 p2 = 0.2237 p3 = 0.2584 p4 = 0.3267 p5 = 0.0628 p6 = 0.0845
(5) ‘‘Bundesliga-KickTipp” (CASE 5) x € base interest payment and 0 € x € base interest x € base interest x € base interest x € base interest x € base interest
bonus payment and 12.5 € payment and 25 € bonus payment and 37.5 € payment and 50 € bonus payment and 100 €
bonus bonus bonus
(6) Given replication of BKT (CASE 6) x € base interest payment and 34.20 € x € base interest x € base interest x € base interest x € base interest x € base interest
penalty payment and 21.70 € payment and 9.20 € payment and 3.30 € payment and 15.80 € payment and 65.80 €
penalty penalty bonus bonus bonus
(7) Binary lottery (CASE 7) 0 € interest payment 0 € interest payment x € interest payment 0 € interest payment 0 € interest payment 0 € interest payment
(8) Free combination of riskless investment 9899.59 €, x € from riskless 9899.59 €, x € from 9899.59 €, x € from 9899.59 €, x € from 9899.59 €, x € from 9899.59 €, x € from
and betting (CASE 8) investment and x1 € from bets placed riskless investment and riskless investment and riskless investment and riskless investment and riskless investment and
on s1 x2 € from bets placed on x3 € from bets placed on x4 € from bets placed on x5 € from bets placed on x6 € from bets placed on
s2 s3 s4 s5 s6

We confront students with eight different decision situations, which vary with respect to the financial instrument under consideration and the origin of the probabilities for the six different future states of nature. In cases 1–4,
probabilities are exogenously given, in cases 5–8 students have to estimate explicitly probabilities for the possible outcomes of the first round of the first German soccer division (the ‘‘Bundesliga”). Cases 1 and 5 ask for the
desirability of a so-called Bundesliga-KickTipp (‘‘BKT”), cases 2 and 6 look at its replication by way of placing sports bets and investing risklessly at 1.90% p.a. Cases 3 and 7 analyze the attractiveness of a binary lottery, and in cases
4 and 8, students can create almost arbitrarily a combination of a riskless investment and sports bets. For cases 1–3 and 5–7, we design instruments in such a way that the student under consideration is eventually indifferent
between the respective financial instrument and a sole riskless investment at 1.90% p.a. We present cases 1–8 sequentially to our probands, i.e., for example, case 1 is presented before case 2, and it is not possible to skip back to
‘‘previous” cases.

2247
2248 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252

All univariate comparisons reported in this paper rely on t-tests.
However, in all cases, results for Wilcoxon signed-rank and rank-
sum tests are almost completely identical and are available as Ta-
bles Ad6 to Ad8 from the authors upon request.
Due to organizational reasons, we selected students for the on-
site questioning from a certain program of studies, which explains
why some characteristics are different from those of the students
who perform the online version of our questionnaire. In particular,
on average, on-site participants have completed three semesters
less, are about one year younger, more often female, possess more
financial knowledge, but are less interested in soccer than their
‘‘online” counterparts. According to a two-sided t-test, the first
three differences are significant on a 1% level and the last two on
a 5% level. Nevertheless, despite such distinctive features, there
are hardly any differences in the answers of both subgroups of stu-
dents (see Table Ad2, available from the authors upon request).
Simple univariate t-tests merely hint at the possibility that there
are significant differences between both groups only for the case
of a binary lottery with exogenous probabilities (on a 1% signifi-
cance level) and for the replicating strategy with exogenous prob-
abilities (on a 5% significance level).
The same holds true for multivariate analyses, when we simulta-
neously take into account all six personal characteristics (including
an ‘‘online” variable) in order to explain optimal expected rates of re-
turn in cases 4 and 8 of free payment structure design opportunities
and to explain minimum required expected rates of return to reach
indifference between the uncertain financial instrument under
consideration and a riskless investment at 1.90% p.a. in cases 1–3
and 5–7 (see Table Ad3, available from the authors upon request).
Moreover, these multivariate linear regression approaches suggest
the limited relevance of (general) personal characteristics for the
decision problems at hand. When we perform eight regressions for
the eight decision problems under consideration, with each having
six regression variables plus a constant, we get only six variables
that are significantly different from zero on a significance level of
at least 5%, with two of them being the online variable. Similar re-
sults hold true when we look separately at the online students (only
four significant variables on a 5% level or better) or the other ones
(only one significant variable on a 5% level or better) (see Tables
Ad4 and Ad5, available from the authors upon request). In addition,
global significance of all regressions is generally quite poor. Only one
out of all 24 regressions is globally significant on a 1% level, two are
globally significant on a 5% level and another one on a 10% level.
The influence of general personal characteristics for the decision
problems under consideration seems to be quite unsystematic and
thus of only limited relevance. We therefore present all our main
results in Tables 6–9 without making any distinction between dif-
ferent subgroups of students and examine whether our findings
are in line with our previous theoretical considerations. To this
end, we state several hypotheses, as displayed in Table 5.
Obviously, with the help of Hypothesis 1, we are able to assess
the relevance of CPT for issues of practical financial engineering.
Hypothesis 2 aims at identifying the relevance of hedonic framing
in financial decision making, a phenomenon which would be par-
ticularly relevant to explain the advantage of sports betting prod-
ucts in comparison to the direct placement of bets. With the help
of Hypothesis 3(a), we want to find out whether investors behave
on average in a risk-loving manner so that sports betting products
become viable in comparison to a fixed rate investment. Hypothe-
sis 3(b) examines whether simple (relatively risky) binary bets as
typically offered by bookmakers are indeed preferable to complex
(and relatively less risky) financial instruments like the SKT or
here: the BKT.
While Hypotheses 1–3 address the issue of risk-loving decision
behavior and its origins, Hypothesis 4 aims at examining the rele-
vance of non-monetary utility components as a cause for a benefi-
cial issuance of financial instruments with sports betting
component. In particular, supporters of Bayern Munich may accept
smaller premia for Bayern Munich becoming ‘‘Herbstmeister” than
the other investors, as Bayern Munich winning the first round of
the Bundesliga may generate positive utility for its supporters,
and individuals are not able to separate such non-monetary re-
wards from corresponding monetary ones. This should be particu-
larly true when referring to investors’ subjective probability
assessments. However, it would be more interesting for the issuer
of such financial instruments if supporters of Bayern Munich were
also willing to accept lower expected rates of return even on the
basis of the average probability assessments across all individuals
(as a proxy of the unknown ‘‘true” probability distribution). If,
however, supporters of Bayern Munich are driven by hedging
considerations, Hypothesis 4 should be rejected at least on the ba-
sis of personal probability assessments with minimum required
expected rates of return for supporters of Bayern Munich being
significantly greater than for other individuals. Certainly, for case
3 with exogenously given probabilities we would expect no
differences in behavior between supporters of Bayern Munich
and the other individuals.
Closely connected to Hypothesis 4(a), Hypothesis 4(b) examines
the issue of whether supporters of Bayern Munich are overly
optimistic with respect to ‘‘their” soccer team. Apparently, this last
aspect in particular tackles the problem of heterogeneous expecta-
tions, which is also the object of Hypothesis 5.
Hypothesis 5 states that, due to ambiguity aversion, minimum
required expected rates of return in a situation with exogenously
given probabilities should be smaller than in situations with
‘‘unknown” objective probabilities.

Table 5
Hypotheses with respect to the demand for sports betting products.
Hypothesis 1: cumulative prospect theory
Hypothesis 2: hedonic framing
Hypothesis 3: general risk-loving behavior
Hypothesis 4: non-monetary utility
components
Hypothesis 5: heterogeneous expectations and
ambiguity aversion
Hypothesis 6: flexibility enhancement
Hypothesis 7: profit potential of sports betting
products
Average minimum expected interest rates in cases 1–3 and 5–7 are equal to those values as implied on average by CPT for
either low or high subjectively felt competence levels and with or without hedonic framing
In cases 1 and 5, minimum required expected rates of return are smaller than in the corresponding cases 2 and 6
(a) Minimum required expected rates of return in cases 1–3 and 5–7 are smaller than the riskless interest rate of 1.90%
(b) Binary lotteries are acceptable for smaller expected rates of return than the BKT
(a) With respect to case 7, supporters of the FC Bayern Munich will accept a smaller expected rate of return from their
personal view as well as for the average probability assessment across all individuals. With respect to case 3, such dif-
ferences are not observable
(b) Supporters of the FC Bayern Munich estimate a higher probability of Bayern Munich becoming ‘‘Herbstmeister” than
the other investors
In cases 1–3, individuals on average accept lower expected rates of return than in cases 5–7 on the basis of their personal
probability assessments
Minimum required expected rates of return in cases 4 and 8 are smaller than those in the corresponding cases 1–3 and 5–7
For an issuing bank, it is possible to realize a positive expected net return from selling the BKT (or its replicating strategy)
and the binary lottery in cases 1–3 and 5–7
 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252 2249

By way of Hypothesis 6, we want to find out something about
the relevance of control illusion on the students’ side by allowing
them to fine-tune future payment structures.
Hypothesis 7 then points to the question of whether it is possi-
ble to earn money with the issuance of sports betting products.
We start our testing with Hypothesis 1, as this is the most spe-
cific one, because we want to examine whether CPT may be of
practical use in a quantitative manner on an aggregated level. Re-
cent experimental findings by Erner et al. (2008) cast some doubt
upon the possibility of forecasting individual investment behavior
on the basis of CPT. To this end, Erner et al. (2008) derive value
functions and probability weighting functions for each of their pro-
bands and then examine whether their successive experimental
investment choices are in line with their optimal behavior accord-
ing to CPT. Although CPT is a descriptive decision theory, its fore-
casting power turns out to be rather poor. Complementing Erner
et al. (2008), in our study we want to examine the practical value
of CPT on a more aggregated level.
In order to do so, we define four ‘‘ideal” candidates, who follow
CPT with a low (lc) or a high (hc) subjectively felt competence level
and with (hf) or without hedonic framing (nhf). The respective com-
petence levels can be identified with different parameters of an
individual’s probability weighting function w. According to Latti-
more et al. (1992), and with pcum as a shortcut for cumulative prob-
abilities like pi þ    þ pN or p1 þ    þ pi , respectively, we have:
d  pccum
wd;c ðpcum Þ :¼
d  pcum þ ð1  pcum Þc
c
8 þ c
þ according to students’ answers. Similar results would emerge for
>
< wþ ðpcum Þ :¼ þ cþ d pcum ðDx > 0Þ
d pcum þð1pcum Þc
þ other parameter constellations, e.g., utilizing median values
:¼
>
: w ðp
c
d pcum
cum Þ :¼ d pc c ðDx < 0Þ:
cum þð1pcum Þ
Parameter d mainly determines the absolute values of probabil-
ity weights and thus is also called ‘‘attractiveness”, because proba-
bilities become more attractive (i.e. lead to higher probability
weights) for higher values of d. Parameter c determines in particu-
lar the slope of the probability weighting function in the range of
medium-sized probabilities and is therefore called ‘‘discriminabil-
ity”, because differences in probabilities are more pronounced for
higher values of c. In general, d and c may assume different values
in the region of gains Dx > 0 (w+) and in the region of losses Dx < 0
(w) and for different decision situations with a decision maker’s
subjectively felt ‘‘competence” being a predominant influential fac-
tor. We follow Breuer and Perst (2007) in applying the parameter
estimates of Abdellaoui (2000) (d+ = 0.65 and d = 0.84 as well as
c+ = 0.6 and c = 0.65) as a description of a representative decision
maker with a low level of subjectively felt competence, while we
use parameter estimates according to Abdellaoui et al. (2005)
(d+ = 0.975 and d = 1.345 as well as c+ = 0.832 and c = 0.842) to
characterize an individual with a high level of subjectively felt
competence. Apparently, higher competence levels coincide with
higher values for both parameters d and c.
Moreover, we have to specify an individual value function v().
From empirical observations of Tversky and Kahneman (1992)
and of Abdellaoui (2000), we may conclude
(
ðDxÞa ; Dx P 0;
v ðDxÞ ¼ ð3Þ
k  ðDxÞb ; Dx < 0
With a  b  0.88 and k  2.25 as typical parameter estimates.
With these parameter values in mind, in cases 1–3, we rely on
the exogenously given probability assessments, while in cases 5–
7, we refer to students’ subjective probability estimates and com-
pute average minimum required expected rates of return across
all four ideal candidates and all 335 subjective probability esti-
mates. In Table 6, we compare our results according to CPT for
these four ideal candidates with the actual results of our question-
ing for the cases 1–3 and 5–7. Apparently, for ideal candidates 2–4
in cases 1, 2, 5, and 6, we observe risk-loving behavior. Moreover,
the consequences of hedonic framing do seem to be quite pro-
nounced. Our theoretical conjectures of the previous section with
respect to the consequences of CPT are thus verified. However,
with only one exception, results according to CPT differ signifi-
cantly on very high significance levels from the actual results
ð2Þ
according to Erner et al. (2008) without or with hedonic framing,
and would only in case 1 not imply statistical differences from
our experimental findings on very high significance levels as in
Table 6 for ideal candidates 1–4 (though median investors accord-
ing to Erner et al., 2008, violate parameter constellations deemed
plausible for CPT, see for the latter Gurevich et al., 2009). Despite
its empirical nature, CPT seems to fail to forecast actual behavior
for our decision problem. Summarizing, Hypothesis 1 has to be
rejected.
Nevertheless, it may still be that hedonic framing is relevant for
the decision problem at hand, but, according to Table 7, by compar-
ing minimum required expected interest rates in cases 1 and 2
(difference: 0.020%) as well as in cases 5 and 6 (difference:
0.010%), we learn that hedonic framing is not really a relevant
issue for the decision problems under consideration, although
cases 2 and 6 indeed require somewhat higher minimum expected
rates of return than their counterparts in cases 1 and 5. Thus, we
cannot verify Hypothesis 2, either.

Table 6
Minimum required expected rates of return according to CPT in comparison to students’ answers.

(a) CASE 1: (b) CASE 2: (c) CASE 3: (d) CASE 5: (e) CASE 6: (f) CASE 7:
++ +++ +++ +++
(1) Avg. min. required expected rates of return (students’ answers) 1.904% 1.924% 2.657% 1.955% 1.965% 2.625%+++
(2) Ideal candidate 1 (lc,nhf) 1.925%*** 1.925% 2.250%*** 1.929%*** 1.929%*** 1.908%***
(3) Ideal candidate 2 (hc,nhf) 1.888%** 1.888%*** 2.000%*** 1.895%*** 1.895%*** 2.120%***
(4) Ideal candidate 3 (lc,hf) 1.837%*** 1.889%*** 2.250%*** 1.824%*** 1.897%*** 1.908%***
(5) Ideal candidate 4 (hc,hf) 1.784%*** 1.852%*** 2.000%*** 1.780%*** 1.860%*** 2.120%***

This table presents minimum required expected rates of return for four different ‘‘ideal” candidates according to CPT (with either low (‘‘lc”) or high competence (‘‘hc”) level
and either hedonic framing (‘‘hf”) or not (‘‘nhf”)). For rows 2–5, values in columns a to c are based on exogenously given probabilities so that we compute only one CPT-based
minimum required expected rate of return for each ideal candidate. We calculate respective values in columns d to f on the basis of students’ individual probability
assessments so that there are 335 CPT-based rates of return for each ideal candidate 1–4 with corresponding average values presented in this table. We then compare the
individual results for the ideal candidates to individual minimum expected rates of return according to students’ actual answers (we present average minimum required rates
of return according to students’ answers in row 1). *** (**, *) stands for significant differences between ideal and actual results on a 1% (5%, 10%) level according to t-test results.
One should note that for simple binary lotteries with a base payment of 0 €, hedonic framing is not an issue so that in cases 3 and 7 ideal candidates 3 and 4 behave like their
respective counterparts 1 and 2. +++ (++, +) stands for significant differences between students’ minimum expected rates of return and the fixed interest rate of 1.90% on a 1%
(5%, 10%) level.
2250 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252

Table 7
Differences between minimum required expected rates of return for different cases according to students’ answers.

Differences CASE 1: CASE 2: CASE 3: CASE 4: CASE 5: CASE 6: CASE 7: CASE 8:

(‘‘rowcolumn”) 1.904% 1.924% 2.657% 1.643% 1.955% 1.965% 2.625% 2.821%
CASE 1 xxx 0.020%* 0.751%*** 0.261%*** 0.051%*** 0.061%*** 0.721%*** 0.917%***
CASE 2 0.020%* xxx 0.733%*** 0.281%*** 0.031%** 0.041%*** 0.701%*** 0.897%***
CASE 3 0.751%*** 0.733%*** xxx 1.014%*** 0.702%*** 0.692%*** 0.032% 0.164%
CASE 4 0.261%*** 0.281%*** 1.014%*** xxx 0.312%*** 0.322%*** 0.982%*** 1.178%***
CASE 5 0.051%*** 0.031%** 0.702%*** 0.312%*** xxx 0.010% 0.670%*** 0.866%***
CASE 6 0.061%*** 0.041%*** 0.692%*** 0.322%*** 0.010% xxx 0.660%*** 0.856%***
CASE 7 0.721%*** 0.701%*** 0.032% 0.982%*** 0.670%*** 0.660%*** xxx 0.196%
CASE 8 0.917%*** 0.897%*** 0.164% 1.178%*** 0.866%*** 0.856%*** 0.196% xxx

This table presents differences between minimum required expected rates of return as a result of the pairwise comparison (‘‘row versus column”) for all eight cases under
consideration. For cases 5–8, we compute expected rates on the basis of the students’ respective subjective probability assessments. *** (**, *) stands for significant differences
between observed minimum required expected rates of return for the two cases under consideration on a 1% (5%, 10%) level (according to t-tests). ‘‘xxx” denotes constel-
lations which are not considered.

Although CPT and hedonic framing do not seem to be of partic-
ular relevance, it nevertheless might be that individuals overweigh
small probabilities and thus exhibit risk-loving behavior. However,
according to row 1 of Table 6, individuals on average do not exhibit
risk-loving behavior in any of the cases 1–3 and 5–7. Moreover, as
revealed by Table 7, minimum required expected rates of return
are significantly higher for binary lotteries than for the BKT.
Hypotheses 3(a) and (b) have, then, to be rejected as well. In fact,
the rejection of Hypothesis 3(b) is also valid for our ideal decision
makers 1–4 who act according to CPT with a subjectively felt low
or high competence level (see Table 6). The reason for this is simply
that the probability of success is not small enough. It thus seems
that the overweighting of small probabilities may favor binary lot-
teries only for more extreme outcomes.
Table 8 reveals that in case 7 supporters of Bayern Munich are
indeed satisfied with significantly lower expected rates of return
than other investors on the basis of average probability assess-
ments. Corresponding extreme differences are not prevalent in
case 3, so that we may conjecture that this finding is a direct con-
sequence of the specific characteristics of the binary lottery in case
7. Moreover, supporters of Bayern Munich estimate the success of
‘‘their” team in becoming ‘‘Herbstmeister” significantly higher than
the remaining investors (see Table 8, column d). However, based
on individual probability assessments, there are no significant
differences between supporters of Bayern Munich and other indi-
viduals. This means that non-monetary utility components per se
do not play a major role for the decision problem under consider-
ation, but the degree of sympathy for a future uncertain sporting
outcome may influence probability assessments. Thus, we can
partially verify Hypothesis 4 and may highlight a comparative
disadvantage of a rather complex financial instrument like the
BKT in comparison to simple binary lotteries. The latter are more
suited to exploit overly optimistic expectations of supporters of
certain teams. However, this issue already carries over to the gen-
eral question of what impact heterogeneous expectations may
have on investor behavior.
In fact, according to Table 7, in cases 1 and 2, minimum required
expected rates of return (based on individual expectations) are sig-
nificantly smaller than in corresponding cases 5 and 6. Only for
case 3 versus case 7 (difference: 0.032%) does this not hold. Never-
theless, it might be a consequence of the rather simple structure of
the binary lottery, which may reduce the problem of ambiguity
aversion. Generally speaking, we may accept Hypothesis 5.
Following Table 7, Hypothesis 6 is obviously true for the case of
exogenously given expectations. Some kind of control illusion may
reduce minimum required rates of return in such a way that indi-
viduals behave in a risk-loving manner. Based on individual expec-
tations in case 8 however, we have to reject Hypothesis 6. The
reason for this finding may be a more pronounced ambiguity aver-
sion in quite complex decision situations. However, and even more
plausible, a flexibility enhancement, as defined in this paper,
makes it easy for investors to exploit deviations in expectations
from those we suggest by the odds offered. Probabilities as implied
by these odds in case 8 are identical to those that we state in the
row ‘‘exogenous probabilities. . .” of Table 4 (calculated as odds/
1.1557, e.g. (1/6.5)/1.1557 = 0.1331, as this assures the sum of all
probabilities adding up to 1). The average student estimates the
probability of Hoffenheim becoming ‘‘Herbstmeister” much higher
than the probability as suggested by the corresponding odds
(0.3267 versus 0.2012) and one can exploit such discrepancies best
in situations with ‘‘flexibility enhancement”, thus leading to high
subjectively expected rates of return.
Summarizing, up to now, our experimental results offer only
weak support for our theoretical hypotheses. On average, people
do not behave in a risk-loving way, there is no relevant hedonic
framing, and CPT does not play any important role. Non-monetary

Table 8
Minimum required expected rates of return and probability assessments by supporters of Bayern Munich (BM) and ‘‘other” individuals in cases 3 and 7.

CASE 3 CASE 7
Minimum required expected rates of return
(a) . . .for exogenously given (b) . . .for individual subjective (c) . . .for average probability (d) Average probability assessment for
probabilities (p3 = 24.04%) probability assessments assessments (p3 = 25.84%) BM becoming ‘‘Herbstmeister”
(1) Supporters 2.283% 2.939% 2.092%*** 46.96%***
of BM
(2) Other 2.688% 2.599% 3.195% 24.06%
individuals

This table presents minimum required expected rates of return for cases 3 and 7 as well as corresponding probability assessments for the event of Bayern Munich (BM)
becoming ‘‘Herbstmeister” (first round champion). *** (**, *) in row 1 stands for significant differences between supporters of Bayern Munich and other individuals on a 1% (5%,
10%) level (t-test results). In column b, we compute average expected rates of return for case 7 across all supporters of BM and all other individuals on the basis of students’
respective individual probability assessments. In column c, we compute average expected rates of return for case 7 across all supporters of BM and all other individuals on the
basis of a probability of BM becoming ‘‘Herbstmeister” of 25.84%, which equals the average probability assessment for this event across all individuals. In case 3, because of
exogenously given probabilities, such a distinction of probability assessments is not necessary.
 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252
utility components may only work in an indirect way by influenc-
ing probability estimates, and ambiguity aversion leads to increas-
ing minimum required expected rates of return in situations with
heterogeneous expectations. Flexible product design opportunities
may be advantageous from a bank’s point of view in situations
with homogeneous expectations, but make the issuer particularly
vulnerable in situations when probabilities are not common
knowledge.
Rather unexpectedly, in spite of these quite disillusioning re-
sults, it seems possible to make money with sports betting prod-
ucts. The reason for this is that, even if individuals behave on
average in a risk-averse manner, there may be a considerable share
of risk-loving people. The fact of a pronounced diversity in prefer-
ences is already well-known from the literature on experimental
decision theory so far. For example, in Abdellaoui et al. (2007),
there is a coefficient of variation of m = 0.457892 for their experi-
mental results with respect to parameter a in (3). Taking the
þ
parameter values aIC1 = 0.88, cþ IC1 ¼ 0:6, and dIC1 ¼ 0:65 of ideal
candidate 1 (the one whose required rates in Table 6 seem to be
nearest to the findings of our experiment) as our starting point,
we re-compute minimum required expected rates of return for
cases 1 and 3 with values of a, c+, and d+ being identical to aIC1,
cþIC1 , and dþIC1 plus or minus once or twice v times aIC1, cþIC1 , and
dþ
IC1 , respectively. Under the simplifying (ad hoc) assumptions of
the coefficient of variation for parameters c+ and d+ of Eq. (2) being
identical to m as well and all three parameter values being
þ
approximately normally distributed with aIC1, cþ IC1 , and dIC1 as their
3
respective expectation values, the range of all 5 = 125 different
constellations under consideration encompasses for each
parameter the corresponding 95% confidence interval of possible
realizations. For case 1 (3), in 51.20% (36.00%) of all parameter
constellations, we observe risk-loving behavior. In spite of the
shortcomings of the CPT with respect to a direct quantitative
evaluation of sports betting products, this finding may hint at the
possibility of a sufficient diversity among individuals so that a
(risk-neutral) bank may gain money by the issuance of sports bet-
ting products. In fact, as Table 9 reveals, in our experiment, there is
always a considerable share of persons who behave in a risk-loving
manner, i.e. individuals who accept expected rates of return below
the riskless interest rate of 1.90%. Actually, this implies that there
is room for issuing sports betting products, so that there will be a
positive net gain for the issuer even in the case where the riskless
lending and borrowing rates are both identical to 1.90%. To be
more precise, based on the distribution of minimum required ex-
pected rates of return in the cases 1–3 and 5–7 of our experiment
and with n standing for the number of investors who are willing to
Table 9
Optimal pricing policy for a risk-neutral bank in cases 1–3 and 5–7.
Average minimum required Standard deviation of
expected rate of return (as seen minimum required rates of
from students’ view point) (%) return across students (%)
CASE 1 1.904 0.14
CASE 2 1.924 0.19
CASE 3 2.657 1.13
CASE 4 1.643 0.17
CASE 5 1.955 0.16
CASE 6 1.965 0.16
CASE 7 2.625 1.51
CASE 8 2.821 1.38
For all eight cases, this table presents average minimum required expected rates of return as seen from the students’ (= investors’) point of view as well as corresponding
return standard deviations across students and the share of risk-loving students. Based on this information, we determine a risk-neutral bank’s optimal price-setting behavior
for an expected gross return of 1.90% under the assumption of maximizing its expected overall net return. For cases 5–7, we assume that the bank’s expectations are identical
to the average probability assessments across all probands. The last three columns present for each of the eight cases the bank’s profit maximizing expected rate of return
offered to investors for their money (achieved by an adjustment of the base interest payment x according to Table 4 in cases 1, 2, 5, and 6 and the interest payment x in state s3
according to Table 4 in cases 3 and 7), the percentage of all individuals accepting this offer, and the bank’s resulting expected net profit. ‘‘xxx” denotes cases which are not
considered.
2251
buy the financial instrument at given return conditions for 10,000 €
(and their personal probability assessments in cases 5–7), we
determine that corresponding expected rate of return r (as seen
from the bank’s point of view; with expectations in cases 5–7
according to average probability assessments across all probands),
which maximizes the bank’s expected net profit (0.019  r)
10,000 n for the bank’s lending rate (i.e. expected gross return)
of 1.90% p.a. Apparently, according to the last three columns of
Table 9, there is indeed a potential for buying sports betting
products and thus we can verify Hypothesis 7.
At first glance, somewhat surprisingly, in order to exploit
individuals’ risk-loving behavior, binary lotteries are much more
suited than payment structures like that of the BKT. The reason
is simply that such extreme payment structures like that of a
binary lottery lead to much more varying minimum required
expected rates of return across individuals, even in situations with
homogeneous expectations (see the standard deviations of
minimum required rates of return in case 3 versus cases 1 and
2). This effect is even more pronounced for heterogeneous expecta-
tions (case 7 versus cases 5 and 6) and may thus explain the
practical relevance of binary lotteries even in situations with
success probabilities not being extremely small.
These results highlight the fact that the overall assessment of
sports betting products (and presumably of other financial instru-
ments as well) is not necessarily driven by the average investor’s
behavior but by the diversity of investors. Nevertheless, the deci-
sion problem underlying Table 9 only takes riskless lending and
borrowing as an alternative into account. Compared to the simple
placement of bets at bookmakers’, however, such financial instru-
ments seem to offer no advantage, as hedonic framing does not
play a crucial role in assessing the desirability of sports betting
products and one may better exploit potential causes for risk-lov-
ing behavior by way of direct sports bets. In this respect, sports
betting products are somewhat ‘‘stuck in the middle”. Certainly,
banks may mimic the supply of bookmakers by way of bonus pay-
ments upgrades or flexibility enhancements, as defined above.
However, the problem of subjective probability assessments may
be severe on the bank’s side. As already mentioned, the standard
deviation of minimum required expected rates of return across
all individuals is significantly lower for the BKT than for the binary
lottery and – for the binary lottery – differs considerably between
case 3 (homogeneous expectations) and case 7 (heterogeneous
expectations) while this is not true for the BKT. These results hint
at the problem that the consequences of differences in expecta-
tions are much more severe for binary lotteries than for the BKT.
A similar result is true for case 8, i.e. for flexibility enhancements
Share of Bank’s profit maximizing expected Share of Bank’s maximum expected net
risk-loving rate of return offer (as seen from buyers profit (as seen from bank’s
students (%) bank’s viewpoint) viewpoint)
39.10 1.70% 8.96% 600.00 €
32.24 1.65% 8.36% 691.63 €
26.27 1.22% 11.04% 2516.00 €
80.00 xxx xxx xxx
25.97 1.70% 11.94% 659.70 €
25.97 1.76% 10.75% 377.73 €
32.54 1.21% 15.82% 3471.10 €
13.73 xxx xxx xxx
2252 W. Breuer et al. / Journal of Banking & Finance 33 (2009) 2241–2252
in situations with heterogeneous expectations. With banks not
possessing the expertise of bookmakers, bonus payment upgrades
or flexibility enhancements of financial instruments with sports
betting components will be quite ‘‘risky”. Based on these findings,
it should become hard for such sports betting products to achieve a
major relevance on capital markets that goes beyond the role of a
mere marketing gimmick. However, it would be interesting to
support our conjecture by a quantitative empirical analysis of the
market for such financial instruments.
5. Conclusion
The object of this paper is a detailed analysis of so-called sports
betting (financial) products on a decision-theoretical and experi-
mental grounding. Sports betting products are ‘‘en vogue” – in
particular in connection with sports ‘‘mega events”. Quite often,
the literature declares such offers as being nothing but a mere
marketing gimmick. The reason is that such financial instruments
must – at the same time – prove their superiority to simple fixed
term investments and to the offers of professional bookmakers.
At first glance, this proves particularly difficult in situations with
homogeneous expectations. However, for the ‘‘Sparkassen-Kick-
Tipp” as a typical example of a financial instrument with a sports
betting component, we are able to identify theoretically several
potential reasons which may make this instrument an attractive
investment. Besides the phenomenon of heterogeneous expecta-
tions, such instruments may be interesting because of the simulta-
neous existence of non-monetary utility components (as is the case
for supporters of a certain team), the overweighting of small
probabilities and hedonic framing effects.
Unfortunately, by way of an experiment, we are able to find out
that the average investor does not behave in a risk-loving manner,
and that heterogeneity in expectations is more a problem than an
advantage. Moreover, hedonic framing does not seem to be of any
significant relevance. Non-monetary utility components may be
only of indirect importance by influencing probability assessments.
Nevertheless, in spite of these average results, diversity of prefer-
ences and expectations may indeed give rise to a profitable issu-
ance of sports betting products to a – rather limited – share of
investors. In any case, one would exploit the demand for sports
betting products by such investors best with financial instruments
that mimic a direct placement of bets. With most bankers not pos-
sessing a special expertise in the field of sports bets, they should
better leave such offers that react quite sensitively to misspecifica-
tions of probabilities to bookmakers. But then, the market for
sports betting products should be of only limited relevance and
thus the characterization of them as ‘‘marketing gimmicks” may
be adequate.
Moreover, the results of this paper may be of general impor-
tance. When trying to assess the profit potential of a new financial
instrument, it seems necessary to determine the distribution of
preferences for this instrument across possible buyers. Referring
to ‘‘average” investors may imply quite misleading results. More-
over, according to Erner et al. (2008), the application of CPT on a
micro level is not able to explain the demand for financial instru-
ments, either. Thus, one should directly ask a representative
cross-section of investors for their preferences regarding a new
financial instrument in question. Future research should focus
more on the diversity of preferences in order to better assess the
potential success of financial innovations.
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