Loving the long shot: Risk taking with skewed lotteries

Philip Johnson Grossman, Catherine Eckel

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We develop a new protocol to elicit preferences over gambles that contain large, asymmetric, low-probability outcomes. Subjects first select their preferred choice from a set of zero-skewness gambles, providing a measure of their preferences for risk as standard deviation. The new lottery choices have the same expected payoffs and standard deviation as the original set of choices, but with positive skewness. We find that subjects are skewness-seekers and more importantly, positive skewness in the payoff structure increases the riskiness of subjects preferred lottery choices. We conclude that skewed, long-shot payoffs entice decision makers to higher levels of risk taking.
Original languageEnglish
Pages (from-to)195 - 217
Number of pages23
JournalJournal of Risk and Uncertainty
Volume51
Issue number3
DOIs
Publication statusPublished - 2015

Cite this

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Loving the long shot: Risk taking with skewed lotteries. / Grossman, Philip Johnson; Eckel, Catherine.

In: Journal of Risk and Uncertainty, Vol. 51, No. 3, 2015, p. 195 - 217.

Research output: Contribution to journalArticleResearchpeer-review

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AU - Grossman, Philip Johnson

AU - Eckel, Catherine

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N2 - We develop a new protocol to elicit preferences over gambles that contain large, asymmetric, low-probability outcomes. Subjects first select their preferred choice from a set of zero-skewness gambles, providing a measure of their preferences for risk as standard deviation. The new lottery choices have the same expected payoffs and standard deviation as the original set of choices, but with positive skewness. We find that subjects are skewness-seekers and more importantly, positive skewness in the payoff structure increases the riskiness of subjects preferred lottery choices. We conclude that skewed, long-shot payoffs entice decision makers to higher levels of risk taking.

AB - We develop a new protocol to elicit preferences over gambles that contain large, asymmetric, low-probability outcomes. Subjects first select their preferred choice from a set of zero-skewness gambles, providing a measure of their preferences for risk as standard deviation. The new lottery choices have the same expected payoffs and standard deviation as the original set of choices, but with positive skewness. We find that subjects are skewness-seekers and more importantly, positive skewness in the payoff structure increases the riskiness of subjects preferred lottery choices. We conclude that skewed, long-shot payoffs entice decision makers to higher levels of risk taking.

U2 - 10.1007/s11166-015-9228-1

DO - 10.1007/s11166-015-9228-1

M3 - Article

VL - 51

SP - 195

EP - 217

JO - Journal of Risk and Uncertainty

JF - Journal of Risk and Uncertainty

SN - 0895-5646

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