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Willingness to pay and the demand for lotto

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Why do many bettors participate in an unfair gamble, in particular a lotto game, while at the same time purchase insurance? The willingness-to-pay for lotto is analysed to find a ‘rational' explanation for a (local) risk-averter's participation in an unfair bet. A reasonable case is found where bettors' preference can be approximately characterized as a locally risk-averse and sufficiently prudent cubic function. Such bettors dislike risk but prefer standard third moment of the payoff. The result suggests that the traditional effective price for lotto demand may omit important explanatory variables. We thus propose an alternative method to examine the demand for lotto by incorporating the second and the third moments of lotto's payoff. Evidence from Taiwan Lotto data supports that lotto bettors could be both (locally) risk-averse and rational.
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Document Type: Research Article

Affiliations: 1: Department of Finance, Shih Hsin University, No. 1, Lane 17, Sec. 1, Mu-Cha Rd, Taipei, Taiwan 116 2: Department of Finance, Taiwan University, 50 Lane 144, Keelung Rd., Sec. 4, Taipei, Taiwan 106

Publication date: 2006-06-10

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