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Which Optimal Design For LLDAs?

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  • Marie Pfiffelmann

    ()
    (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)

Abstract

Lottery-linked deposit accounts are financial assets that provide an interest rate determined by a lottery. The aim of this study is to determine the optimal design of these financial assets (under cumulative prospect theory (CPT) framework). We underline that the weighting functions usually specified in the literature should be re-modeled if we want to apply CPT to finance. We propose to replace them by another functional form that preserves the main characteristics of the inverse S-shape specification, but whose slope at zero is finite. The optimal structure of payments obtained is consistent with the conclusions of behavioral portfolio theory (2000).

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Bibliographic Info

Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2006-06.

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Date of creation: 2006
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Handle: RePEc:lar:wpaper:2006-06

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Related research

Keywords: Lottery-Linked-Deposit Account; Cumulative Prospect Theory; Design optimal; Probability Weighting.;

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References

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  1. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  2. Clotfelter, Charles T & Cook, Philip J, 1990. "On the Economics of State Lotteries," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(4), pages 105-19, Fall.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  4. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, INFORMS, vol. 27(1), pages 15-25, 01-02.
  5. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 35(02), pages 127-151, June.
  6. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, Springer, vol. 8(2), pages 167-96, March.
  7. Mauro F. Guillén & Adrian E. Tschoegl, 2001. "Banking on Gambling: Banks and Lottery-Linked Deposit Accounts," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 00-25, Wharton School Center for Financial Institutions, University of Pennsylvania.
  8. Marie Pfiffelmann, 2007. "How to solve the St Petersburg Paradox in Rank-Dependent Models ?," Working Papers of LaRGE Research Center, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg 2007-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  9. Michael Kilka & Martin Weber, 2001. "What Determines the Shape of the Probability Weighting Function Under Uncertainty?," Management Science, INFORMS, INFORMS, vol. 47(12), pages 1712-1726, December.
  10. Enrico Giorgi & Thorsten Hens, 2006. "Making prospect theory fit for finance," Financial Markets and Portfolio Management, Springer, Springer, vol. 20(3), pages 339-360, September.
  11. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 122(1), pages 119-131, May.
  12. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 297-323, October.
  13. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, Econometric Society, vol. 66(3), pages 497-528, May.
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Cited by:
  1. Marie Pfiffelmann, 2007. "How to solve the St Petersburg Paradox in Rank-Dependent Models ?," Working Papers of LaRGE Research Center, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg 2007-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

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