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Loss Aversion? Not with Half-a-Million on the Table!

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Author Info
Pavlo Blavatskyy
Ganna Pogrebna
Abstract

In the television show Affari Tuoi a contestant is endowed with a sealed box containing a monetary prize between one cent and half a million euros. In the course of the show the contestant is offered to exchange her box for another sealed box with the same distribution of possible monetary prizes inside. This offers a unique natural laboratory for testing the predictions of expected utility theory versus prospect theory using lotteries with large stakes. While expected utility theory predicts that an individual is exactly indifferent between accepting and rejecting the exchange offer, prospect theory predicts that an individual should always reject the exchange offer due to the assumption of loss aversion. We find that the assumption of loss aversion is violated by 46 percent of all contestants in our recorded sample. Thus, contestants do not appear to be predominantly loss averse when dealing with lotteries involving large stakes.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp274.

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Date of creation: Feb 2006
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Handle: RePEc:zur:iewwpx:274

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Keywords: loss aversion expected utility theory prospect theory natural experiment

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Find related papers by JEL classification:
C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gee, C., 2007. "Risky Choice and Type-Uncertainty in "Deal or No Deal?"," Cambridge Working Papers in Economics 0758, Faculty of Economics, University of Cambridge. [Downloadable!]
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