Alternation Bias and Sums of Identically Distributed Monetary Lotteries

José Antonio Robles-Zurita ()
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José Antonio Robles-Zurita: Department of Economics, Universidad Pablo de Olavide

No 15.08, Working Papers from Universidad Pablo de Olavide, Department of Economics

Abstract: The outcome distribution of a sum of identical monetary lotteries ( ) is described with a Markov model. A decision maker with the alternation bias believes in more negative autocorrelation between lotteries and perceives as a less risky asset (lower variance) than a rational agent does. Also the expected utility of for a risk averse (risk seeking) individual is higher (lower) if she is a believer in the alternation bias. This theoretical result can be applied to the analysis of decisions on repeated investments and turns to be a plausible explanation for Samuelson's fallacy of large numbers..

Keywords: alternation bias; repeated lotteries, expected utility, risk aversion, Markov chain; behavioural finance (search for similar items in EconPapers)
JEL-codes: D03 D81 G02 G11 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-06
New Economics Papers: this item is included in nep-ore and nep-upt
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