Why People Choose Negative Expected Return Assets - an Empirical Examination of a Utility Theoretic Explanation

Bhattacharyya, Nalinaksha; Garrett, Thomas A.

doi:10.2139/ssrn.891759

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Why People Choose Negative Expected Return Assets - an Empirical Examination of a Utility Theoretic Explanation

22 Pages Posted: 23 Mar 2006

See all articles by Nalinaksha Bhattacharyya

Thomas A. Garrett

Federal Reserve Bank of St. Louis - Research Division

Date Written: March 15, 2006

Abstract

Using a theoretical extension of the Friedman and Savage (1948) utility function developed in Bhattacharyya (2003), we predict that for financial assets with negative expected returns, expected return will be a declining and convex function of skewness. Using a sample of U.S. state lottery games, we find that our theoretical conclusions are supported by the data. Our results have external validity as they also hold for an alternative and more aggregated sample of lottery game data.

Keywords: Lotteries, Skewness, Negative Expected Return Assets

JEL Classification: D80, D81, G10, G12

Suggested Citation: Suggested Citation

Bhattacharyya, Nalinaksha and Garrett, Thomas A., Why People Choose Negative Expected Return Assets - an Empirical Examination of a Utility Theoretic Explanation (March 15, 2006). Available at SSRN: https://ssrn.com/abstract=891759 or http://dx.doi.org/10.2139/ssrn.891759