We present the results of an experimental study of the evaluation of lotteries and options on lotteries. In the underlying experiment, 118 students were asked to bid prices for buying, selling and selling short simple lotteries and options on lotteries. The lotteries presented to the subjects are supposed to represent simplified stock, call options and put options on stock. To avoid labeling effects, however, the problems did not explicitly mention financial terms like stock and options. Subjects were told in advance that the lotteries and the options will be sold or purchased from them using second price auctions. Some of the main findings and conclusions are:

(a) Subjects bidding patterns (and attitudes to risk) seem to be dependent on their position with respect to the underlying asset. In particular, the bids for buying an asset (stock, call, put) long are statistically uncorrelated with the bids for selling the same asset short

(b) The prices that subjects with a fixed endowment (I) are willing to pay for a stock are significantly higher than the prices in which they are willing to sell the stock (long). In this sense, the endowment effect does not carry over to the case where the basic income level of the subjects is fixed and the object under consideration is a lottery.

(c) The prices that subjects demand for selling call and put options short are significantly higher than the prices they agree to pay for corresponding options.

(d) Subjects with extreme risk attitude (strong risk aversion or strong risk preference) are more likely to violate basic no-arbitrage conditions (like the call-put parity) in their bidding patterns.

Co-authors Shavit Tal and Benzion Uri