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Testing alternative theories of financial decision making: an experimental study with lottery bonds

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  • Patrick Roger

    (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg)

Abstract

In this article, a simple paper-and-pencil experiment, based on lottery bonds, shows that financial decisions taken by participants are inconsistent with the traditional view of economic agents as risk averse expected utility maximizers. First, our results cast doubt on the relevance of variance as a measure of risk and put to light the importance of skewness in decision making. The decisions taken by participants are consistent with the optimal distortion of beliefs introduced in Brunnemeier and Parker (2005) and Brunnemeier et al. (2007). As a by-product of this study, we also illustrate the fact that people use heuristics when they choose numbers at random and have, in general, a poor opinion about the rationality of others.

Suggested Citation

  • Patrick Roger, 2009. "Testing alternative theories of financial decision making: an experimental study with lottery bonds," Working Papers of LaRGE Research Center 2009-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2009-08
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    File URL: http://ifs.u-strasbg.fr/large/publications/2009/2009-08.pdf
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    Cited by:

    1. Filiz-Ozbay, Emel & Guryan, Jonathan & Hyndman, Kyle & Kearney, Melissa & Ozbay, Erkut Y., 2015. "Do lottery payments induce savings behavior? Evidence from the lab," Journal of Public Economics, Elsevier, vol. 126(C), pages 1-24.
    2. Francois R. Velde, 2018. "Lottery Loans in the Eighteenth Century," Working Paper Series WP-2018-7, Federal Reserve Bank of Chicago.

    More about this item

    Keywords

    Lottery bonds; optimal beliefs; probability distortion; risk aversion.;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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