We analyze one of the explanations why people participate in lotteries. Our hypothesis stipulates that part of the value that a unit of money buys in lotteries is consumed before the actual resolution in the form of emotions such as hope. In other words, a person holding a lottery ticket may...

We apply utility indifference pricing to solve a contingent claim problem, valuing a connected pair of gas fields where the underlying process is not standard Geometric Brownian motion and the assumption of complete markets is not fulfilled. First, empirical data are often characterized by...

Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. This model implies that, for a given compensation scheme, the agent’s optimal effort is unrelated to the amount of noise in the performance measure. In contrast,...

The origin of prospect theory is the desire to test the intuitive statistician in the real world. The development of this theory by the cognitive psychologists Kahneman and Tversky can be traced to the former's work in cognitive psychophysics, in which deviations from average behavior are termed...

We conduct an experiment to test whether the size of a loss and the time in a losing position affect investors’ adaptation to the loss situation and, subsequently, whether this adaptation affects future investment decisions. As investors adapt to losses, their neutral reference point shifts...

We explore the feasibility of a funded pension system with intergenerational risk sharing when participation in the system is voluntary. Typically, the willingness of the young to participate depends on their belief about the future young's willingness to do so. We characterise equilibria with...

In this paper we propose the use of preferred outcome distributions as a new method to elicit individuals' value and probability weighting functions in decisions under risk. Extant approaches for the elicitation of these two key ingredients of individuals' risk attitude typically rely on a long,...