Schroeder, David (2025) Lotto lotteries – Decision making under uncertainty when payoffs are unknown. Journal of Behavioral and Experimental Economics 114 (102310), ISSN 2214-8043.
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Abstract
This paper analyses decision making under uncertainty when payoffs are unknown, similar to a Lotto lottery. In a Lotto lottery, the probability of winning a prize is known, but the size of the prize is unknown. This paper proposes a theoretical framework to model preferences over Lotto lotteries as compound lotteries. The first stage determines whether a prize is obtained, while the second stage determines the size of the prize. Then the paper empirically analyses human behaviour when uncertainty can be described as a Lotto lottery. There is considerable heterogeneity in the subjects’ aversion to lotteries with unknown payoffs. Further analysis shows that choices of decision makers can be best explained by a combination of risk and ambiguity preferences. These results suggest that subjects treat unknown payoffs similar to known payoffs with ambiguous probabilities.
Metadata
| Item Type: | Article |
|---|---|
| Keyword(s) / Subject(s): | decision making, uncertainty, risk aversion, lotteries, ambiguity aversion, subjective expected utility |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Research Centres and Institutes: | Accounting and Finance Research Centre |
| Depositing User: | David Schroeder |
| Date Deposited: | 09 Dec 2024 14:32 |
| Last Modified: | 09 Dec 2024 17:38 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/54493 |
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