Selling to Biased Believers: Strategies of Online Lottery Ticket Vendors

Economic Inquiry, Vol. 53, 2015

27 Pages Posted: 27 Jul 2015 Last revised: 7 Sep 2016

See all articles by Jaimie W. Lien

Jaimie W. Lien

Shandong University - Center for Economic Research

Jia Yuan

University of Macau - Department of Finance and Business Economics

Date Written: February 11, 2015

Abstract

We provide evidence that sellers respond to buyers’ belief biases in a collective lottery betting market, by adopting sales strategies which cater to believers in the Hot Hand and Gambler’s Fallacies. Lottery players on the buyer side tend to avoid buying tickets which are similar to the previous winning ticket, in accordance with the Gambler’s Fallacy (Clotfelter and Cook, 1993; Terrell, 1994). At the same time, buyers tend to prefer purchasing tickets from previously winning sellers, despite the fully random nature of wins, in accordance with Hot Hand Fallacy (Croson and Sundali, 2005). These behavioral biases provide an opportunity for ticket sellers to increase their expected profits by adjusting features of the lottery portfolios they sell. We find that sellers make changes to their portfolio size, commission rate, self-purchase rate, and number choices in response to previous events, in ways that are consistent with responding to the Hot Hand Fallacy belief, and which also lend a degree of support for the response to the Gambler’s Fallacy belief. Our results show evidence of participants in a market accommodating their choices to the biased beliefs of other participants in order to gain a personal advantage in expected profits.

Keywords: Biased Beliefs, Hot-Hand Fallacy, Gambler’s Fallacy

JEL Classification: D01, D03, D81, L86

Suggested Citation

Lien, Jaimie W. and Yuan, Jia, Selling to Biased Believers: Strategies of Online Lottery Ticket Vendors (February 11, 2015). Economic Inquiry, Vol. 53, 2015, Available at SSRN: https://ssrn.com/abstract=2636126

Jaimie W. Lien (Contact Author)

Shandong University - Center for Economic Research ( email )

Jinan, Shandong 250100
China

Jia Yuan

University of Macau - Department of Finance and Business Economics ( email )

Macau

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