Project

Probability of Winning in Risky Choices

Goal: Media reports show that high earners and syndicates buy lottery tickets in bulk. Experimental evidence shows that agents aggressively bid in auctions and contests. Do people make trade-offs between cost/effort and the probability of winning (in environments they can) to reach a suitable chance of winning? The literature on risky choices suggests so. In the main design of this experiment, we deconstruct the expected value with variance and skewness of a lottery with Bernoulli distribution to examine the decision making process. Based on the results, a proportion is classified as expected utility maximizer (EUM) while another proportion is trading off cost with the probability of winning and apparently have a minimum probability of winning (MPW). More MPWs prefer higher probabilities compared to EUMs in a constant value lottery set which may explain preference for negative skewness in experiments. Additionally, we test two contests designs and find MPWs in the population which may explain the puzzle of equilibrium effort more than risk-neutral Nash equilibrium in experiments.

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Vikas Chaudhary
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Media reports show that high earners and syndicates buy lottery tickets in bulk. Experimental evidence shows that agents aggressively bid in auctions and contests. Do people make trade-offs between cost/effort and the probability of winning (in environments they can) to reach a suitable chance of winning? The literature on risky choices suggests so. In the main design of this experiment, we deconstruct the expected value with variance and skewness of a lottery with Bernoulli distribution to examine the decision making process. Based on the results, a proportion is classified as expected utility maximizer (EUM) while another proportion is trading off cost with the probability of winning and apparently have a minimum probability of winning (MPW). More MPWs prefer higher probabilities compared to EUMs in a constant value lottery set which may explain preference for negative skewness in experiments. Additionally, we test two contests designs and find MPWs in the population which may explain the puzzle of equilibrium effort more than risk-neutral Nash equilibrium in experiments.