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Poverty and Probability: Aspiration and Aversion to Compound Lotteries in El Salvador and India

Research1 min read

Author: Dean Spears

Published in: Experimental Economics

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Abstract:

Some experimental participants are averse to compound lotteries: they prefer simple lotteries that depend on only one random event, even when the simple lotteries offer lower expected value. This paper proposes that many behavioral “investments” represent more compound risk for poorer people – who often face multiple dimensions of deprivation – than for richer people. As a result, identical aversion to compound lotteries can prevent investment among poorer people, but have no effect on richer people.

The paper reports five studies: two initial studies that document that aversion to compound lotteries operates as an economic preference, two “laboratory experiments in the field” in El Salvador, and one internet survey experiment in India. Poorer Salvadoran women who choose a compound lottery are 27 percentage points more likely to have found formal employment than those who chose a simple lottery, but lottery choice is unrelated to employment for richer women.

Poorer students at the national Salvadoran university choose more compound lotteries than richer students, on average, implying that aversion to compound lotteries screened out poorer aspirants but not richer ones. Poorer and lower-caste Indian participants who choose compound lotteries are more likely than those who choose simple lotteries to have a different occupation than their parents, which is not the case for better-off participants.

These findings that the consequences of aversion to compound lotteries are different in the context of poverty and disadvantage are robust to regression respecifications and the inclusion of covariate controls, including for academic and math ability and demographic heterogeneity.

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