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Which Optimal Design for Lottery Linked Deposit Accounts?

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Author Info
Marie Pfiffelmann () (LaRGE (Laboratoire de Recherche en Gestion et en Economie),FSEG, ULP, Université de Strasbourg I, Pôle Européen de Gestion et d’Economie)

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Abstract

Lottery-linked deposit accounts (LLDAs) are financial assets that provide an interest rate determined by a lottery. These accounts that combine savings and lottery have become very popular in recent years and in a number of countries (Guillen and Tschoegel). However, their existence cannot be explained in the framework of the expected utility model. Their popularity can only be understood in light of behavioral finance studies, especially if individual preferences are described by Kahneman and Tversky's cumulative prospect theory (1992). Actually, this theory provides a good explanation for the emergence of these deposit accounots by integrating simultaneously risk-averse and risk-seeking behaviors. In this paper, we propose a behavioral analysis of these financial assets by assuming that investors' individuals preferences obey cumulative prospect theory. We study how the structure of prizes of the LLDAs should be framed to appeal to and attract many investors. Our aim is thus to determine the optimal design of these financial assets.

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File URL: http://www.solvay.edu/EN/Research/Bernheim/documents/wp07010.pdf
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File Function: First version, 2007
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Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number 07-010.RS.

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Length: 29 pages
Date of creation: Mar 2007
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Handle: RePEc:sol:wpaper:07-010

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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

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  1. Mauro Guillén & Adrian Tschoegl, 2002. "Banking on Gambling: Banks and Lottery-Linked Deposit Accounts," Journal of Financial Services Research, Springer, vol. 21(3), pages 219-231, June. [Downloadable!] (restricted)
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  2. 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.
  3. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08. [Downloadable!] (restricted)
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  4. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May. [Downloadable!] (restricted)
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  6. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 127-151, June. [Downloadable!]
  7. Conlisk, John, 1993. " The Utility of Gambling," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 255-75, June.
  8. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151. [Downloadable!] (restricted)
  9. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-96, March.
  10. Shapira, Zur & Venezia, Itzhak, 1992. "Size and frequency of prizes as determinants of the demand for lotteries," Organizational Behavior and Human Decision Processes, Elsevier, vol. 52(2), pages 307-318, July. [Downloadable!] (restricted)
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