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Prospect Theory, Mental Accounting, and Differences in Aggregated and Segregated Evaluation of Lottery Portfolios

  • Thomas Langer

    ()

    (Universität Mannheim, Lehrstuhl für Bankbetriebslehre, L 5, 2, 68131 Mannheim, Germany)

  • Martin Weber

    ()

    (Universität Mannheim, Lehrstuhl für Bankbetriebslehre, L 5, 2, 68131 Mannheim, Germany)

If individuals have to evaluate a sequence of lotteries, their judgment is influenced by the presentation mode. Experimental studies have found significantly higher acceptance rates for a sequence of lotteries if the overall distribution was displayed instead of the set of lotteries itself. Mental accounting and loss aversion provide an easy and intuitive explanation for this phenomenon. In this paper we offer an explanation that incorporates further evaluation concepts of Prospect Theory. Our formal analysis of the difference in aggregated and segregated portfolio evaluation demonstrates that the higher attractiveness of the aggregated presentation mode is not a general phenomenon (as suggested in the literature) but depends on specific parameters of the lotteries. The theoretical findings are supported by an experimental study. In contrast to the existing evidence and in line with our theoretical results, we find for specific types of lotteries an even lower acceptance rate if the overall distribution is displayed.

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File URL: http://dx.doi.org/10.1287/mnsc.47.5.716.10483
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 47 (2001)
Issue (Month): 5 (May)
Pages: 716-733

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Handle: RePEc:inm:ormnsc:v:47:y:2001:i:5:p:716-733
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  1. Christian Gollier, 1996. "Repeated Optional Gambles and Risk Aversion," Management Science, INFORMS, vol. 42(11), pages 1524-1530, November.
  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.
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