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When a risky prospect is valued more than its best possible outcome

Author

Listed:
  • Andreas C. Drichoutis

    (Department of Agricultural Economics & Rural Development, Agricultural University of Athens)

  • Rodolfo M. Nayga, Jr.

    (Department of Agricultural Economics & Agribusiness, University of Arkansas)

  • Jayson L. Lusk

    (Department of Agricultural Economics, Oklahoma State University)

  • Panagiotis Lazaridis

    (Department of Agricultural Economics & Rural Development, Agricultural University of Athens)

Abstract

In this paper, we document a violation of normative and descriptive models of decision making under risk. In contrast to uncertainty effects found by Gneezy, List and Wu (2006), some subjects in our experiments valued certain lotteries more than the best possible outcome. We show that the likelihood of observing this effect is positively related to the probability of winning the lottery and negatively related to the value of the maximum outcome. We also demonstrate that this effect can be partially attributed to subjects’ competitiveness and level of comprehension of the lottery mechanism; the competitiveness effects far outweighing comprehension effects.

Suggested Citation

  • Andreas C. Drichoutis & Rodolfo M. Nayga, Jr. & Jayson L. Lusk & Panagiotis Lazaridis, 2009. "When a risky prospect is valued more than its best possible outcome," Working Papers 2009-12, Agricultural University of Athens, Department Of Agricultural Economics.
    • Handle: RePEc:aua:wpaper:2009-12
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    Keywords

    lottery; risk; competitiveness; Vickrey auctions;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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