Range Effects and Lottery Pricing

Pavlo R. Blavatskyy and Wolfgang R. K�hler

No 323, IEW - Working Papers from Institute for Empirical Research in Economics - 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 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 equivalent; experiment; stochastic; Becker-DeGroot-Marschak (BDM) method; elicitation procedure; range effects (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-exp and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:323

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