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Prospect-Theory, Mental Accounting and Differences in Aggregated and Segregated Evaluation of Lottery Portfolios

Thomas Langer () and Martin Weber
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Thomas Langer: Westfälischen Wilhelms-Universität Münster Lehrstuhl für BWL, insbesondere Finanzierung, Postal: Universitätsstraße 14-16 48143 Münster

No 99-64, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: If individuals have to evaluate a portfolio (or sequence) of lotteries their judgment is influenced by the portfolio presentation mode. Experimental studies (Redelmeier and Tversky, 1992, Benartzi and Thaler, 1998) found significantly higher acceptance rates for a sequence of lotteries, if the overall distribution was displayed instead of the set of lotteries itself. The literature provides an easy and intuitive explanation for this phenomenon based on mental accounting and loss aversion. It predicts the experimental findings to translate to all kinds of lottery types and portfolio sizes. In this paper we offer an explanation, which incorporates further evaluation concepts of Prospect Theory. Our formal analysis of the difference in aggregated and segregated portfolio evaluation demonstrates that the higher attractiveness of the aggregated presentation mode is not a general phenomenon, but depends on specific parameters of the lotteries. The theoretical findings are supported by an experimental study. In contrast to the existing evidence and in line with our theoretical results we find for specific types of lotteries an even lower acceptance rate, if the overall distribution is displayed.

Date: 1999-06-21
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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