Essays on Decision Making Over Risk

Abstract

I make several contributions to the literature on decision making over risk-bearing products. Summarily, my research highlights the importance of non-distributional factors in the decision-making process for products bearing risk. I demonstrate that the majoritarian consumer behavior of the multi-billion-dollar Mega Millions lottery game is not rationalizable by existing preference-based models. Non-preference-based explanations are also unable to account for the observed behavior. I identify factors likely influencing choice behavior and incorporate them into a new model, which can account for the majoritarian choice behavior. In a separate project, I explore the relationship between risk preferences and preferences over winning number selection in games of chance. I provide novel experimental and empirical evidence of an interdependence of these preferences. Specifically, I find that at relatively reasonable odds, self-selection of winning numbers is most preferred. However, when odds worsen, allocation of selection to a random mechanism becomes most preferred. In a third project, I explore consumer preferences over Prize Linked Savings (PLS) products, which have the principal guarantee of standard savings products coupled with the positive return skewness of games of chance. I provide experimental evidence that designing PLS products with gaming features, like those found in games of chance, increases the appeal of PLS and the creation of savings. Furthermore, PLS products so designed may serve as better substitutes for games of chance than PLS products without such features.

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