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Designing a Lottery for a Regret Averse Consumer

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This paper investigates how a lottery operator might profit from a consumer’s regret aversion. We derive the conditions under which an expected profit maximising monopolist finds it optimal to supply a “realistic” lottery game to a regret averse consumer and we interpret the results with a measure of regret aversion, identifying the central relationship between the consumer’s regret aversion and intrinsic risk aversion in the determination of the lottery contract. We parameterise regret aversion and we calculate the optimal design for consumers with different degrees of regret aversion. We show that expected profit is increasing with the consumer’s regret aversion.

This talk is part of the Cambridge Experimental and Behavioural Research Group (CEBEG) series.

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