Risk Attitude, Win Loving and the Evaluation of Lotteries - an Experimental Study

47 Pages Posted: 2 May 2004

See all articles by Tal Shavit

Tal Shavit

Ben-Gurion University of the Negev - Department of Economics

Shosh Shahrabani

Emek Yezreel College - Department of Economics

Uri Ben-Zion

Technion-Israel Institute of Technology

Date Written: January 2004

Abstract

The purpose of this study is to analyze the subjective value of lotteries, which represent stock and options on the stock. Subjects were asked to bid the prices for buying, selling and short selling of different lotteries in a second price auction. In addition, we classify subjects by risk attitude based on auctions. In our experiment, we found the existence of a group of subjects with win-loving behavior. We argue that win-loving subjects seem to have a strong win bias value in their utility function, therefore, the top-dog effect influence their financial decision making for risky assets. As a result, they are bidding higher prices for buying assets in auctions, while asking lower prices for selling the same assets (opposite to the Endowment effect). One of our results shows that hedging opportunity influences differently risk-averse, risk seekers and win-lovers subjects. The new classification of win-lovers, a sub-group of risk-seekers, as well as the classification of subjects according to their risk attitude, have important implications for the relevance of the results of many previous works, that have used second-price auction to determine the value of an asset. It also explains why participants in auctions often tend to pay prices that are above the market value of those assets. We also found that the influence of the Framing effect is different for risk-averse, risk seekers and win-lovers subjects. This result has important implications on offering financial contracts to investors in future and options exchanges.

Keywords: Behavioral economics, lotteries, experiment, auction, risk aversion

JEL Classification: D44, C91

Suggested Citation

Shavit, Tal and Shahrabani, Shosh and Ben-Zion, Uri, Risk Attitude, Win Loving and the Evaluation of Lotteries - an Experimental Study (January 2004). Available at SSRN: https://ssrn.com/abstract=498943 or http://dx.doi.org/10.2139/ssrn.498943

Tal Shavit (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
(972) 5-2920868 (Phone)
(972) 8-6472941 (Fax)

Shosh Shahrabani

Emek Yezreel College - Department of Economics ( email )

Yezreel 19300
Israel

Uri Ben-Zion

Technion-Israel Institute of Technology ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

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