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Range effects and lottery pricing

Published online by Cambridge University Press:  14 March 2025

Pavlo R. Blavatskyy and
Wolfgang R. Köhler
Pavlo R. Blavatskyy*
Affiliation:
Institute for Empirical Research in Economics, University of Zurich, Winterthurerstrasse 30, 8006, Zurich, Switzerland
Wolfgang R. Köhler*
Affiliation:
Institute for Empirical Research in Economics, University of Zurich, Winterthurerstrasse 30, 8006, Zurich, Switzerland
*
e-mail: pavlo.blavatskyy@iew.unizh.ch
e-mail: wolfgang.koehler@iew.unizh.ch
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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. Nonexpected utility theories can only explain the results if subjects consider compound lotteries generated by the BDM procedure. We present an alternative explanation where subjects sequentially compare the lottery to monetary amounts in order to determine their minimum selling price. The model offers a formal explanation for range effects and for the underweighting of small and the overweighting of large probabilities.

Keywords

Certainty equivalentExperimentStochasticBecker-DeGroot-Marschak (BDM) methodElicitation procedureRange effects

JEL classification

C91: Laboratory, Individual BehaviorD81: Criteria for Decision-Making under Risk and Uncertainty

Information

Type
Research Article
Information
Experimental Economics , Volume 12 , Issue 3 , September 2009, pp. 332 - 349
Copyright
Copyright © Economic Science Association 2009

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Footnotes

We thank seminar participants in Rotterdam and Zürich and at the ESA World Meeting in Rome for helpful comments. We are grateful to Ganna Pogrebna for her assistance with programming the experiment and to Franziska Heusi for her help in organizing the experimental session. Pavlo Blavatskyy acknowledges financial support from the Fund for Support of Academic Development at the University of Zurich. A previous version of this paper was circulated under the title “Lottery Pricing in the Becker-DeGroot-Marschak Procedure”.

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