Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/200577 
Year of Publication: 
2018
Series/Report no.: 
Working Paper No. 2018-07
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
In the 18th century Britain frequently issued lottery loans, selling bonds whose sizewas determined by a draw soon after the sale. The probability distribution was perfectly known ex-ante and highly skewed. After the draw the bonds were identical (except for size) and indistinguishable from regular bonds. I collect market prices for the lottery tickets and show that investors were paying a substantial premium to be exposed to this purely artificial risk. I show that investors were well-to-do and included many merchants and bankers. I turn to cumulative prospect theory to make sense of these observations and estimate the equilibrium model of Barberis and Huang (2008). The preference parameters can account for the level of the lottery premium but cannot always match the systematic rise of prices over the course of the draws.
Subjects: 
lotteries
behavioral finance
cumulative prospect theory
Great Britain
government debt
JEL: 
D81
G12
N13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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