Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation

N. Bhattacharya and Thomas Garrett

Applied Economics, 2008, vol. 40, issue 1, 27-34

Abstract: Using a theoretical extension of the Friedman and Savage (1948) utility function developed in Bhattacharyya (2003), we predict that for assets with negative expected returns, such as state lottery games, expected return will be a declining and convex function of skewness. That is, lottery players trade-off expected return for skewness. Using two samples of lottery game data, we find that our theoretical conclusions are supported by the empirical results. The findings obtained here not only contribute to the literature on why individuals may participate in unfair gambles, the framework could be extended to an analysis of the stock market where higher returns cannot be solely explained by risk (variance).

Date: 2008
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Working Paper: Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation (2006)
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DOI: 10.1080/00036840701335587

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