Unraveling the luck and risk aversion puzzle: a test of perceived luck experiences in lottery choice experiments

• Main Authors: Ng, Qian Yi, Ang, Qiu Yan
• Other Authors: He Tai-Sen
• Format: Final Year Project
• Language: English
• Published: 2018
• Subjects: DRNTU::Social sciences; DRNTU::Business::Finance
• Online Access: http://hdl.handle.net/10356/73683
• Institution: Nanyang Technological University

Experiences form part and parcel of life. As suggested by existing literature, past experiences may shape attitude and preference construction, especially in uncertain or risky environments. Accordingly, we conduct two experiments to investigate how one’s perceived state of luckiness influences one’s subsequent risk-taking behavior in a multi-period lottery task, and the underlying cognitive mechanism respectively. In a laboratory setting, all subjects in both experiments went through two trials of fair ball-drawing game, followed by a 25-period lottery task and lastly, an actual round of the ball-drawing game. Subjects were randomly assigned into “lucky”, “unlucky” or control conditions according to the number of green balls (which correspond to the winning color) they have drawn during the two trials. In both experiments, prior lucky experiences raise subjects' risk aversion in subsequent decisions. Experiment 2 includes a simple yet effective twist to the design that allows us to distinguish between the two cognitive biases hypothesized from the result in Experiment 1 and identify the motivation behind the treatment effect. Consequently, we observe the existence of the stock of luck belief. This implies that subjects presume that luck comes in fixed amounts, and consecutive wins are perceived to deplete their luck. Hence, this raises their degree of risk aversion. These findings have important theoretical and policy implications. We also suggest plausible alternative explanations and future research.