Testing Alternative Theories of Financial Decision Making: An Experimental Study with Lottery Bonds

28 Pages Posted: 28 May 2009

See all articles by Patrick Roger

Patrick Roger

Strasbourg University - LARGE Research Center - EM Strasbourg Business School

Date Written: May 26, 2009

Abstract

In this article, a simple paper-and-pencil experiment, based on lottery bonds, shows that financial decisions taken by participants are inconsistent with the traditional view of economic agents as risk averse expected utility maximizers. First, our results cast doubt on the relevance of variance as a measure of risk and put to light the importance of skewness in decision making. The decisions taken by participants are consistent with the optimal distortion of beliefs introduced in Brunnemeier and Parker (2005) and Brunnemeier et al. (2007). As a by-product of this study, we also illustrate the fact that people use heuristics when they choose numbers at random and have, in general, a poor opinion about the rationality of others.

Keywords: lottery bonds, optimal beliefs, probability distortion, risk aversion

JEL Classification: D03, D81

Suggested Citation

Roger, Patrick, Testing Alternative Theories of Financial Decision Making: An Experimental Study with Lottery Bonds (May 26, 2009). Available at SSRN: https://ssrn.com/abstract=1410021 or http://dx.doi.org/10.2139/ssrn.1410021

Patrick Roger (Contact Author)

Strasbourg University - LARGE Research Center - EM Strasbourg Business School ( email )

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