Market Preferences for Risk Distributions: Evidence from Lottery Loans

Francois Velde ()

No 1048, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Lottery loans were widely used in the 18th century. Instead of buying a long-term bond of known face value, investors entered a lottery which determined the face value (or size) of the bond. The largest prizes were several orders of magnitude larger than the smallest (and most common). At a quarter of median household income, the ticket price was sizable; the identity of lottery winners reported in newspapers confirm that participants were educated and well-to-do. The prices of these lottery loans reveal curious investor behavior. The expected rate of return was lower than on non-random bonds. Drawing the lottery took several weeks; tickets were traded as it unfolded and prices were reported in newspapers. I collect these prices as well as the changing distribution of remaining prizes to evidence the market's preferences over probability distributions.

Date: 2013
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