SELLING TO BIASED BELIEVERS: STRATEGIES OF ONLINE LOTTERY TICKET VENDORS |
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| Authors: | Jaimie W. Lien Jia Yuan |
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| Affiliation: | 1. Department of Decision Sciences and Managerial Economics, The Chinese University of Hong Kong, Hong Kong, China;2. Department of Economics, School of Economics and Management, Tsinghua University, Beijing, China;3. Department of Business Economics, Faculty of Business Administration, University of Macau, MacauWe thank Vincent Crawford, Brad Humphreys, Zhigang Li, Guang‐zhen Sun, and Jie Zheng for helpful comments. We also thank our editor, Robert Rosenman, and three anonymous referees for comments which helped improve the paper. All errors are our own. Jaimie W. Lien acknowledges financial support from the National Science Foundation of China (#71303127 and #71203112), the Ministry of Education, China (#20130002120030), and Tsinghua University (Project #2012z02182 and #2012z02181). Jia Yuan acknowledges financial support from the University of Macau (#MYRG046‐FBA12‐YJ). |
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| Abstract: | We provide evidence that sellers respond to buyers' belief biases in a collective lottery betting market, by adopting sales strategies which cater to believers in the Hot Hand and Gambler's Fallacies. Lottery players on the buyer side tend to avoid buying tickets which are similar to the previous winning ticket, in accordance with the Gambler's Fallacy (Clotfelter and Cook 1993; Terrell 1994). At the same time, buyers tend to prefer purchasing tickets from previously winning sellers, despite the fully random nature of wins, in accordance with Hot‐Hand Fallacy (Croson and Sundali 2005). These behavioral biases provide an opportunity for ticket sellers to increase their expected profits by adjusting features of the lottery portfolios they sell. We find that sellers make changes to their portfolio size, commission rate, self‐purchase rate, and number choices in response to previous events, in ways that are consistent with responding to the Hot‐Hand Fallacy belief, and which also lend a degree of support for responding to the Gambler's Fallacy belief. Our results show evidence of participants in a market accommodating their choices to the biased beliefs of other participants in order to gain an advantage in expected profits. (JEL D01, D03, D81, L86) |
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