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Loving the Long Shot: Risk Taking with Skewed Lotteries

  • Philip J. Grossman
  • Catherine C. Eckel

We develop a new protocol, adapted from the Eckel and Grossman (2002, 2008) risk measure, to elicit skewness preferences. The new lottery choices have the same expected payoffs and risk (variance) as the original choices, but with increasing degrees of positive skewness. We find that our subjects are skewness-seekers. More importantly, positive skewness in the payoff structure increases the number of subjects willing to gamble as well as increasing subjects’ risk taking in lottery choices. We conclude that skewed, long-shot payoffs entice decision makers to higher levels of risk taking than they otherwise would prefer.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2012/4112lovinglonggrossmaneckel.pdf
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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 41-12.

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Length: 35 pages
Date of creation: Sep 2012
Handle: RePEc:mos:moswps:2012-41
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