The Near Miss Effect and the Framing of Lotteries

TL;DR

This paper introduces a framework to analyze how the near miss effect influences decision making in lotteries, linking lottery framing to coding theory and explaining the popularity of small-probability lotteries.

Contribution

It proposes a near miss index, analyzes optimal lottery design, and connects the near miss effect with coding theory to explain lottery framing and attractiveness.

Findings

Near miss index quantifies the effect in lotteries.

Optimal lottery design can be influenced by near miss framing.

Lotteries with small winning probabilities are particularly attractive.

Abstract

We present a framework for analyzing the near miss effect in lotteries. A decision maker (DM) facing a lottery, falsely interprets losing outcomes that are close to winning ones, as a sign that success is within reach. As a result of this false belief, the DM will prefer lotteries that induce a higher frequency of near misses, even if the underlying probability of winning is constant. We define a near miss index that measures the near miss effect induced by a given lottery and analyze the optimal lottery design in terms of near miss. This analysis leads us to establish a fruitful connection between our near miss framework and the field of coding theory. Building on this connection we compare different lottery frames and the near miss effect they induce. Analyzing an interaction between a seller and a buyer of lotteries allows us to gain further insight into the optimal framing of lotteries and might offer a potential explanation as to why lotteries with a very small probability of winning are commonplace and attractive.