An Experimental Study of Attitude towards Compound Lottery

28 Pages Posted: 15 Apr 2012 Last revised: 16 Nov 2012

See all articles by Bin Miao

Bin Miao

Shanghai University of Finance and Economics - School of Economics

Songfa Zhong

National University of Singapore (NUS) - Department of Economics

Date Written: November 16, 2012

Abstract

This paper examines systematically the attitude towards compound lottery by introducing three variants of symmetric uniform mean-preserving spread into stage-1 risk in a choice-based experimental setting. We do not observe consistent aversion to mean-preserving spread in the stage-1 risk. More importantly, the observed behavioral patterns reject a number of axioms including reduction of compound lotteries, time neutrality, and stage-1 betweenness (independence), which sheds light on related recursive utility models. The overall data support two-stage rank-dependent utility with distinct convex probability weighting functions in two stages.

Keywords: compound lottery, second order risk, non-expected utility

JEL Classification: C91, D81

Suggested Citation

Miao, Bin and Zhong, Songfa, An Experimental Study of Attitude towards Compound Lottery (November 16, 2012). Available at SSRN: https://ssrn.com/abstract=2039216 or http://dx.doi.org/10.2139/ssrn.2039216

Bin Miao (Contact Author)

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

Songfa Zhong

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

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