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Myopic risk-seeking: The impact of narrow decision bracketing on lottery play

Abstract

In two experiments conducted with low-income participants, we find that individuals are more likely to buy state lottery tickets when they make several purchase decisions one-at-a-time, i.e. myopically, than when they make one decision about how many tickets to purchase. These results extend earlier findings showing that “broad bracketing” of decisions encourages behavior consistent with expected value maximization. Additionally, the results suggest that the combination of myopic decision making and the “peanuts effect”—greater risk seeking for low stakes than high stakes gambles—can help explain the popularity of state lotteries.

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Notes

  1. 1.

    These estimates are conservative since they do not account for the fact that a substantial fraction of the households included in the data do not play the lottery. Clotfelter et al. (1999) estimates that approximately 50% of low-income households play the lottery.

  2. 2.

    See Benartzi and Thaler (1999) for a discussion of why this decision implies loss aversion, not simply risk aversion.

  3. 3.

    Some studies even find higher absolute demand for lottery tickets among low-income populations (Clotfelter et al. 1999; Hansen 1995) and Hansen et al. (2000) report that, across five states, income is a more consistent predictor of lottery ticket sales than education, race, or age.

  4. 4.

    Results are unchanged if income is excluded from the analysis.

  5. 5.

    Since the outcome of the 5th ticket purchase is irrelevant for future decisions, this count excludes the 5th round.

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Acknowledgement

We thank the editor and an anonymous referee for extensive helpful comments. We also thank research assistants Ryan Menefee and Sarat Mikkilineni. This research was funded by the Russell Sage Foundation Small Grants in Behavioral Economics Program.

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Correspondence to George Loewenstein.

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Haisley, E., Mostafa, R. & Loewenstein, G. Myopic risk-seeking: The impact of narrow decision bracketing on lottery play. J Risk Uncertain 37, 57–75 (2008). https://doi.org/10.1007/s11166-008-9041-1

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Keywords

  • Decision framing
  • Bracketing
  • State lotteries
  • Myopic loss aversion
  • Peanuts effect
  • Gambling

JEL Classification

  • C91
  • D81
  • I30