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

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Author Info

  • 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.

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File URL: http://aoatools.aua.gr/RePEc/aua/wpaper/files/2009-12_risky_prospects.pdf
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Bibliographic Info

Paper provided by Agricultural University of Athens, Department Of Agricultural Economics in its series Working Papers with number 2009-12.

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Length: 14 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:aua:wpaper:2009-12

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Web page: http://www.aoa.aua.gr
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Keywords: lottery; risk; competitiveness; Vickrey auctions;

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References

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  1. Gill, David & Stone, Rebecca, 2010. "Fairness and Desert in Tournaments," MPRA Paper 21322, University Library of Munich, Germany.
  2. Lusk,Jayson L. & Shogren,Jason F., 2007. "Experimental Auctions," Cambridge Books, Cambridge University Press, number 9780521855167, October.
  3. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
  4. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstr�m, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
  5. Cox, James C. & Grether, David M., 1993. "The Preference Reversal Phenomenon: Response Mode, Markets and Incentives," Working Papers 810, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  7. Uri Gneezy & John List & George Wu, 2006. "The uncertainty effect: When a risky prospect is valued less than its worst possible outcome," Framed Field Experiments 00152, The Field Experiments Website.
  8. David J. Cooper & Hanming Fang, 2006. "Understanding Overbidding in Second Price Auctions: An Experimental Study," Cowles Foundation Discussion Papers 1557, Cowles Foundation for Research in Economics, Yale University.
  9. Ondrej Rydval & Andreas Ortmann & Sasha Prokosheva & Ralph Hertwig, 2009. "How Certain Is the Uncertainty Effect?," CERGE-EI Working Papers wp385, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  10. Jay R. Corrigan & Andreas C. Drichoutis & Jayson L. Lusk & Rodolfo M. Nayga & Matthew C. Rousu, 2012. "Repeated Rounds with Price Feedback in Experimental Auction Valuation: An Adversarial Collaboration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 97-115.
  11. Kagel, John H & Harstad, Ronald M & Levin, Dan, 1987. "Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study," Econometrica, Econometric Society, vol. 55(6), pages 1275-1304, November.
  12. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 69(4), pages 623-38, September.
  13. Shogren, Jason F. & Cho, Sungwon & Koo, Cannon & List, John & Park, Changwon & Polo, Pablo & Wilhelmi, Robert, 2001. "Auction mechanisms and the measurement of WTP and WTA," Resource and Energy Economics, Elsevier, vol. 23(2), pages 97-109, April.
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