Uncertainty, Choices and Prices in a Market for Lotteries

18 Pages Posted: 28 Sep 2009

See all articles by Gordon Douglas Menzies

Gordon Douglas Menzies

University of Technology Sydney (UTS) - School of Finance and Economics

Daniel John Zizzo

University of Queensland - School of Economics

Date Written: September 2009

Abstract

We consider an experimental setting where agents receive one stylized piece of information at a time about the value of a lottery. We find that Knightian uncertainty about the prior distribution of true lottery values does not hamper decision making by agents and markets. On a mean squared error criterion, Bayesian updating is closer than simple averaging in predicting market prices and individual bids and offers, even in treatments with uncertainty where Bayesian updating should not be feasible given the limited information set. Bayesian updating also outperforms adaptive expectations in relation to market prices.

Keywords: uncertainty, expectations, information, framing

JEL Classification: C91, D83, D84

Suggested Citation

Menzies, Gordon Douglas and Zizzo, Daniel John, Uncertainty, Choices and Prices in a Market for Lotteries (September 2009). Available at SSRN: https://ssrn.com/abstract=1479470 or http://dx.doi.org/10.2139/ssrn.1479470

Gordon Douglas Menzies

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia

Daniel John Zizzo (Contact Author)

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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