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Alternation Bias and Sums of Identically Distributed Monetary Lotteries

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  • José Antonio Robles-Zurita

    (Department of Economics, Universidad Pablo de Olavide)

Abstract

The outcome distribution of a sum of identical monetary lotteries ( ) is described with a Markov model. A decision maker with the alternation bias believes in more negative autocorrelation between lotteries and perceives as a less risky asset (lower variance) than a rational agent does. Also the expected utility of for a risk averse (risk seeking) individual is higher (lower) if she is a believer in the alternation bias. This theoretical result can be applied to the analysis of decisions on repeated investments and turns to be a plausible explanation for Samuelson's fallacy of large numbers..

Suggested Citation

  • José Antonio Robles-Zurita, 2015. "Alternation Bias and Sums of Identically Distributed Monetary Lotteries," Working Papers 15.08, Universidad Pablo de Olavide, Department of Economics.
    • Handle: RePEc:pab:wpaper:15.08
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    References listed on IDEAS

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    More about this item

    Keywords

    alternation bias; repeated lotteries; expected utility; risk aversion; Markov chain; behavioural finance;
    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
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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