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Loving the Long Shot: Risk Taking with Skewed Lotteries

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  • Philip J. Grossman
  • Catherine C. Eckel

Abstract

We develop a new protocol, adapted from the Eckel and Grossman (2002, 2008) risk measure, to elicit skewness preferences. The new lottery choices have the same expected payoffs and risk (variance) as the original choices, but with increasing degrees of positive skewness. We find that our subjects are skewness-seekers. More importantly, positive skewness in the payoff structure increases the number of subjects willing to gamble as well as increasing subjects’ risk taking in lottery choices. We conclude that skewed, long-shot payoffs entice decision makers to higher levels of risk taking than they otherwise would prefer.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2012/4112lovinglonggrossmaneckel.pdf
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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 41-12.

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Length: 35 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:mos:moswps:2012-41

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Postal: Department of Economics, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2493
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Web page: http://www.buseco.monash.edu.au/eco/
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Keywords: Risk; Skewness; Gambling; Long Shot; Lotteries;

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References

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  1. Binswanger, Hans P, 1981. "Attitudes toward Risk: Theoretical Implications of an Experiment in Rural India," Economic Journal, Royal Economic Society, vol. 91(364), pages 867-90, December.
  2. Kearney, Melissa Schettini, 2005. "State lotteries and consumer behavior," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2269-2299, December.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
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  5. Jayson Lusk & T Feldkamp & T Schroeder, 2004. "Experimental auction procedure: Impact on valuation of quality differentiated goods," Artefactual Field Experiments 00097, The Field Experiments Website.
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  8. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  9. 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.
  10. Glenn W. Harrison & Jimmy Martínez-Correa & J. Todd Swarthout, 2012. "Reduction of Compound Lotteries with Objective Probabilities: Theory and Evidence," Experimental Economics Center Working Paper Series 2012-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  11. Catherine Eckel & Philip Grossman & Cathleen Johnson & Angela Oliveira & Christian Rojas & Rick Wilson, 2012. "School environment and risk preferences: Experimental evidence," Journal of Risk and Uncertainty, Springer, vol. 45(3), pages 265-292, December.
  12. Tobias Brunner & Rene Levinsky & Jianying Qiu, 2011. "Preferences for skewness: evidence from a binary choice experiment," The European Journal of Finance, Taylor & Francis Journals, vol. 17(7), pages 525-538.
  13. Charles T. Clotfelter & Philip J. Cook, 1989. "Selling Hope: State Lotteries in America," NBER Books, National Bureau of Economic Research, Inc, number clot89-1, May.
  14. Joseph Golec & Maurry Tamarkin, 1998. "Bettors Love Skewness, Not Risk, at the Horse Track," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 205-225, February.
  15. Philip J. Grossman & Oleksandr Lugovskyy, 2011. "An Experimental Test Of The Persistence Of Gender‐Based Stereotypes," Economic Inquiry, Western Economic Association International, vol. 49(2), pages 598-611, 04.
  16. Garrett, Thomas A. & Sobel, Russell S., 1999. "Gamblers favor skewness, not risk: Further evidence from United States' lottery games," Economics Letters, Elsevier, vol. 63(1), pages 85-90, April.
  17. Quiggin, John, 1991. "On the Optimal Design of Lotteries," Economica, London School of Economics and Political Science, vol. 58(229), pages 1-16, February.
  18. Clotfelter, Charles T & Cook, Philip J, 1990. "On the Economics of State Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 105-19, Fall.
  19. Catherine C. Eckel & Philip J. Grossman, 2002. "Sex Differences and Statistical Stereotyping in Attitudes Toward Financial Risk," Development Research Unit Working Paper Series archive-03, Monash University, Department of Economics.
  20. Chetan Dave & Catherine Eckel & Cathleen Johnson & Christian Rojas, 2010. "Eliciting risk preferences: When is simple better?," Journal of Risk and Uncertainty, Springer, vol. 41(3), pages 219-243, December.
  21. Catherine C. Eckel & Philip J. Grossman, 2008. "Forecasting Risk Attitudes: An Experimental Study Using Actual and Forecast Gamble Choices," Development Research Unit Working Paper Series archive-01, Monash University, Department of Economics.
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