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


  • Langer, Thomas

    () (Westfälischen Wilhelms-Universität Münster Lehrstuhl für BWL, insbesondere Finanzierung)

  • Weber, Martin

    () (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)


If individuals have to evaluate a portfolio (or sequence) of lotteries their judgment is influenced by the portfolio presentation mode. Experimental studies (Redelmeier and Tversky, 1992, Benartzi and Thaler, 1998) found significantly higher acceptance rates for a sequence of lotteries, if the overall distribution was displayed instead of the set of lotteries itself. The literature provides an easy and intuitive explanation for this phenomenon based on mental accounting and loss aversion. It predicts the experimental findings to translate to all kinds of lottery types and portfolio sizes. In this paper we offer an explanation, which 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, 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.

Suggested Citation

  • Langer, Thomas & Weber, Martin, 1999. "Prospect-Theory, Mental Accounting and Differences in Aggregated and Segregated Evaluation of Lottery Portfolios," Sonderforschungsbereich 504 Publications 99-64, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  • Handle: RePEc:xrs:sfbmaa:99-64 Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.

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    References listed on IDEAS

    1. Richard H. Thaler & Amos Tversky & Daniel Kahneman & Alan Schwartz, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 647-661.
    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.
    3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
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    8. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
    9. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    10. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    11. Christian Gollier, 1996. "Repeated Optional Gambles and Risk Aversion," Management Science, INFORMS, vol. 42(11), pages 1524-1530, November.
    12. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
    13. Jeff T. Casey, 1995. "Predicting Buyer-Seller Pricing Disparities," Management Science, INFORMS, vol. 41(6), pages 979-999, June.
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