Stocks as Lotteries? An Experimental Test of Expected Utility vs Behavioral Models

Our study provides the first causal test of classical and behavioral asset pricing models that incorporate skewness pricing. In line with these models, our experimental markets show that skewness is systematically priced thus confirming the need for asset pricing models accounting for asset skewness. Our findings also reveal that positively skewed assets available in small supply exhibit negative expected returns which is consistent with prospect theory but not with expected utility models. In line with the underlying mechanism of prospect theory models, we also show that the negative returns of the positively skewed asset are most pronounced during market sessions where traders overweight the low probability of receiving a large payoff.