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Lottery Loans in the Eighteenth Century


  • Francois R. Velde


In the 18th century Britain frequently issued lottery loans, selling bonds whose size was determined by a draw soon after the sale. The probability distribution was perfectly known ex-ante and highly skewed. After the draw the bonds were identical (except for size) and indistinguishable from regular bonds. I collect market prices for the lottery tickets and show that investors were paying a substantial premium to be exposed to this purely artificial risk. I show that investors were well-to-do and included many merchants and bankers. I turn to cumulative prospect theory to make sense of these observations and estimate the equilibrium model of Barberis and Huang (2008). The preference parameters can account for the level of the lottery premium but cannot always match the systematic rise of prices over the course of the draws.

Suggested Citation

  • Francois R. Velde, 2018. "Lottery Loans in the Eighteenth Century," Working Paper Series WP-2018-7, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2018-07
    DOI: 10.21033/wp-2018-07

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    References listed on IDEAS

    1. Crossley, Thomas F. & Low, Hamish & Smith, Sarah, 2016. "Do consumers gamble to convexify?," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 276-291.
    2. Marie Pfiffelmann, 2009. "Le mariage efficace de l’épargne et du jeu : une approche historique," Working Papers of LaRGE Research Center 2009-07, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    3. Mohammed Abdellaoui & Han Bleichrodt & Olivier L’Haridon, 2008. "A tractable method to measure utility and loss aversion under prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 245-266, June.
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    5. Nikolai Roussanov, 2010. "Diversification and Its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status," Journal of Finance, American Finance Association, vol. 65(5), pages 1755-1788, October.
    6. Florentsen, Bjarne & Rydqvist, Kristian, 2002. "Ex-Day Behavior When Investors and Professional Traders Assume Reverse Roles: The Case of Danish Lottery Bonds," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 152-175, April.
    7. 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.
    8. Ridge, Jenny & Young, Martin, 1998. "Innovations in Savings Schemes: The Bonus Bonds Trust in New Zealand," Financial Services Review, Elsevier, vol. 7(2), pages 73-81.
    9. Patrick Roger, 2009. "Testing alternative theories of financial decision making: an experimental study with lottery bonds," Working Papers of LaRGE Research Center 2009-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
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    12. Murphy, Anne L., 2005. "Lotteries in the 1690s: Investment or Gamble?," Financial History Review, Cambridge University Press, vol. 12(02), pages 227-246, October.
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    More about this item


    Lotteries; behavioral finance; cumulative prospect theory; Great Britain; government debt;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913

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