Range effects and lottery pricing

A standard method to elicit certainty equivalents is the Becker-DeGroot-Marschak (BDM) procedure. We compare the standard BDM procedure and a BDM procedure with a restricted range of minimum selling prices that an individual can state. We find that elicited prices are systematically affected by the...

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Bibliographic Details
Published in:Experimental economics : a journal of the Economic Science Association 2009-09, Vol.12 (3), p.332-349
Main Authors: Blavatskyy, Pavlo R, Köhler, Wolfgang R
Format: Article
Language:English
Subjects:
Becker-DeGroot-Marschak (BDM) method
Behavioral/Experimental Economics
C91
Certainty equivalent
D81
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Elicitation procedure
Expected utility
Expected values
Experiment
Experiments
Game Theory
Lotteries
Microeconomics
Operations Research/Decision Theory
Prices
Pricing
Probability
Range effects
Social and Behav. Sciences
Stochastic
Stochastic processes
Studies
Utility functions
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Summary:A standard method to elicit certainty equivalents is the Becker-DeGroot-Marschak (BDM) procedure. We compare the standard BDM procedure and a BDM procedure with a restricted range of minimum selling prices that an individual can state. We find that elicited prices are systematically affected by the range of feasible minimum selling prices. Expected utility theory cannot explain these results. Non-expected utility theories can only explain the results if subjects consider compound lotteries generated by the BDM procedure. We present an alternative explanation where subjects sequentially compare the lottery to monetary amounts in order to determine their minimum selling price. The model offers a formal explanation for range effects and for the underweighting of small and the overweighting of large probabilities.
ISSN:1386-4157
1573-6938
DOI:10.1007/s10683-009-9215-y