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Which Optimal Design for Lottery Linked Deposit Accounts?

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  • Marie Pfiffelmann

Abstract

Lottery-linked deposit accounts (LLDAs) are financial assets that provide an interest rate determined by a lottery. These accounts that combine savings and lottery have become very popular in recent years and in a number of countries (Guillen and Tschoegel). However, their existence cannot be explained in the framework of the expected utility model. Their popularity can only be understood in light of behavioral finance studies, especially if individual preferences are described by Kahneman and Tversky's cumulative prospect theory (1992). Actually, this theory provides a good explanation for the emergence of these deposit accounots by integrating simultaneously risk-averse and risk-seeking behaviors. In this paper, we propose a behavioral analysis of these financial assets by assuming that investors' individuals preferences obey cumulative prospect theory. We study how the structure of prizes of the LLDAs should be framed to appeal to and attract many investors. Our aim is thus to determine the optimal design of these financial assets.

Suggested Citation

  • Marie Pfiffelmann, 2007. "Which Optimal Design for Lottery Linked Deposit Accounts?," Working Papers CEB 07-010.RS, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:07-010
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    References listed on IDEAS

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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