Why are lotteries valued less? Multiple tests of a direct risk-aversion mechanism
Recent studies have identified the uncertainty effect (UE), whereby risky prospects (e.g., a binary lottery that offers either a $50 or $100 gift certificate) are valued less than their worst possible outcome (a $50 certificate). This effect has been proposed to result from ``direct risk-aversion'' which posits that the mere uncertainty of a lottery directly decreases its value. However, this effect may also be driven by the potential disappointment inherent in not receiving the better of the two outcomes (disappointment aversion), or the mere fact that the risky prospect is referred to as a ``lottery''. The results of two experiments do not support either of these two alternatives. Specifically, the results of Experiment 1 indicate that the UE is observed even when the values of the two lottery outcomes are similar, or even identical. Experiment 2 further replicates the UE in a context in which the word ``lottery'' is never used (a company promotional). These results are consistent with a direct risk-aversion mechanism (Gneezy et al., 2006; Simonsohn, 2009) and suggest that the UE obtains across a number of different contexts.
Volume (Year): 7 (2012)
Issue (Month): 1 (January)
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- Uri Gneezy & John A. List & George Wu, 2006.
"The Uncertainty Effect: When a Risky Prospect is Valued Less than its Worst Possible Outcome,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 121(4), pages 1283-1309.
- George Wu & John List & Uri Gneezy, 2006. "The uncertainty effect: When a risky prospect is valued less than its worst possible outcome," Framed Field Experiments 00152, The Field Experiments Website.
- Ondřej Rydval & Andreas Ortmann & Sasha Prokosheva & Ralph Hertwig, 2009.
"How certain is the uncertainty effect?,"
Springer, vol. 12(4), pages 473-487, December.
- Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 53(2), pages 271-282.
- Enrico Diecidue & Ulrich Schmidt & Peter P. Wakker, 2004. "The Utility of Gambling Reconsidered," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 241-259, December.
- Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
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