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Range Effects and Lottery Pricing


Blavatskyy, Pavlo R; Köhler, Wolfgang R (2008). Range Effects and Lottery Pricing. Working paper series / Institute for Empirical Research in Economics No. 323, University of Zurich.

Abstract

A standard method to elicit certainty equivalents is the Becker-DeGroot-Marschak (BDM) procedure. We compare the standard BDM procedure and a BDM procedure with a restricted range of minimum selling prices that an individual can state. We find that elicited prices are systematically affected by the range of feasible minimum selling prices. Expected utility theory cannot explain these results. Non-expected utility theories can only explain the results if subjects consider compound lotteries generated by the BDM procedure. We present an alternative explanation where subjectsnsequentially compare the lottery to monetary amounts in order to determine theirnminimum selling price. The model offers a formal explanation for range effects and for the underweighting of small and the overweighting of large probabilities.

Abstract

A standard method to elicit certainty equivalents is the Becker-DeGroot-Marschak (BDM) procedure. We compare the standard BDM procedure and a BDM procedure with a restricted range of minimum selling prices that an individual can state. We find that elicited prices are systematically affected by the range of feasible minimum selling prices. Expected utility theory cannot explain these results. Non-expected utility theories can only explain the results if subjects consider compound lotteries generated by the BDM procedure. We present an alternative explanation where subjectsnsequentially compare the lottery to monetary amounts in order to determine theirnminimum selling price. The model offers a formal explanation for range effects and for the underweighting of small and the overweighting of large probabilities.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:April 2008
Deposited On:29 Nov 2011 22:47
Last Modified:12 Aug 2017 13:03
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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