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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Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
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