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Range Effects and Lottery Pricing

Author

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  • Pavlo R. Blavatskyy
  • Wolfgang R. K�hler

Abstract

A standard method to elicit certainty equivalents is the Becker-DeGroot-Marschak (BDM) procedure. We compare the standard BDM procedure and a BDM procedure with a restricted range of minimum selling prices that an individual can state. We find that elicited prices are systematically affected by the range of feasible minimum selling prices. Expected utility theory cannot explain these results. Non-expected utility theories can only explain the results if subjects consider compound lotteries generated by the BDM procedure. We present an alternative explanation where subjects sequentially compare the lottery to monetary amounts in order to determine their minimum selling price. The model offers a formal explanation for range effects and for the underweighting of small and the overweighting of large probabilities.

Suggested Citation

  • Pavlo R. Blavatskyy & Wolfgang R. K�hler, 2008. "Range Effects and Lottery Pricing," IEW - Working Papers 323, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:323
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    Keywords

    Certainty equivalent; experiment; stochastic; Becker-DeGroot-Marschak (BDM) method; elicitation procedure; range effects;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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