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Lottery Loans in the Eighteenth Century

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  • Francois R. Velde

Abstract

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.

Suggested Citation

  • Francois R. Velde, 2018. "Lottery Loans in the Eighteenth Century," Working Paper Series WP-2018-7, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-2018-07
    DOI: 10.21033/wp-2018-07
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    References listed on IDEAS

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    More about this item

    Keywords

    Lotteries; behavioral finance; cumulative prospect theory; Great Britain; government debt;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913

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