Lottery Loans in the Eighteenth Century

40 Pages Posted: 25 Feb 2019 Last revised: 29 Apr 2020

Date Written: May, 2018


In the 18th century Britain frequently issued lottery loans, selling bonds whose size was determined by a draw soon after the sale. The probability distribution was perfectly known ex-ante and highly skewed. After the draw the bonds were identical (except for size) and indistinguishable from regular bonds. I collect market prices for the lottery tickets and show that investors were paying a substantial premium to be exposed to this purely artificial risk. I show that investors were well-to-do and included many merchants and bankers. I turn to cumulative prospect theory to make sense of these observations and estimate the equilibrium model of Barberis and Huang (2008). The preference parameters can account for the level of the lottery premium but cannot always match the systematic rise of prices over the course of the draws.

Keywords: Lotteries, behavioral finance, cumulative prospect theory, Great Britain, government debt

JEL Classification: D81, G12, N13

Suggested Citation

Velde, Francois R., Lottery Loans in the Eighteenth Century (May, 2018). FRB of Chicago Working Paper No. WP-2018-7, Available at SSRN: or

Francois R. Velde (Contact Author)

Federal Reserve Bank of Chicago ( email )

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Economic Research
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