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Mean, Median or Mode? A Striking Conclusion From Lottery Experiments

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  • Kontek, Krzysztof

Abstract

This paper deals with estimating data from experiments determining lottery certainty equivalents. The paper presents the parametric and nonparametric results of the least squares (mean), quantile (including median) and mode estimations. The examined data are found to be positively skewed for low probabilities and negatively skewed for high probabilities. This observation leads to the striking conclusion that lottery valuations are only nonlinearly related to probability when means are considered. Such nonlinearity is not confirmed by the mode estimator in which case the most likely lottery valuations are close to their expected values. This means that the most likely behavior of a group is fully rational. This conclusion is a significant departure from one of the fundamental results concerning lottery experiments presented so far.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21758.

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Date of creation: 30 Mar 2010
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Handle: RePEc:pra:mprapa:21758

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Keywords: Lottery experiments; Least Squares; Quantile; Median; and Mode Estimators; Nonparametric and Parametric Estimators; Relative Utility Function; Prospect Theory.;

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References

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  1. Traub, Stefan & Schmidt, Ulrich, 2006. "An Experimental Investigation of the Disparity between WTA and WTP for Lotteries," Economics Working Papers 2006,09, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Krzysztof Kontek, 2009. "Lottery valuation using the aspiration / relative utility function," Working Papers 39, Department of Applied Econometrics, Warsaw School of Economics.
  3. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  4. Kontek, Krzysztof, 2009. "Absolute vs. Relative Notion of Wealth Changes," MPRA Paper 17336, University Library of Munich, Germany.
  5. Lee, Myoung-jae, 1989. "Mode regression," Journal of Econometrics, Elsevier, vol. 42(3), pages 337-349, November.
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Cited by:
  1. Kontek, Krzysztof, 2010. "Multi-Outcome Lotteries: Prospect Theory vs. Relative Utility," MPRA Paper 22947, University Library of Munich, Germany.
  2. Kontek, Krzysztof, 2010. "Density Based Regression for Inhomogeneous Data: Application to Lottery Experiments," MPRA Paper 22268, University Library of Munich, Germany.

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