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Risk Aversion When Gains Are Likely and Unlikely: Evidence from a Natural Experiment with Large Stakes

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  • Pavlo Blavatskyy
  • Ganna Pogrebna
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    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 learns more information about the distribution of possible monetary prizes inside her box. Consider two groups of contestants, who learned that the chances of their boxes containing a large prize are 20% and 80% correspondingly. Contestants in both groups receive qualitatively similar price offers for selling the content of their boxes. If contestants are less risk averse when facing unlikely gains, the price offer is likely to be more frequently rejected in the first group than in the second group. However, the fraction of rejections is virtually identical across two groups. Thus, contestants appear to have identical risk attitudes over (large) gains of low and high probability.

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    Bibliographic Info

    Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 278.

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    Date of creation: Mar 2006
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    Handle: RePEc:zur:iewwpx:278

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    Keywords: risk attitude; risk aversion; risk seeking; natural experiment;

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    1. Beetsma, R.M.W.J. & Schotman, P.C., 1998. "Measuring Risk Attitudes in a Natural Experiment: Data from The Television Game Show LINGO," Papers 98-48, Southern California - School of Business Administration.
    2. Bennett, Randall W. & Hickman, Kent A., 1993. "Rationality and the 'price is right'," Journal of Economic Behavior & Organization, Elsevier, vol. 21(1), pages 99-105, May.
    3. Berk, Jonathan B & Hughson, Eric & Vandezande, Kirk, 1996. "The Price Is Right, but Are the Bids? An Investigation of Rational Decision Theory," American Economic Review, American Economic Association, vol. 86(4), pages 954-70, September.
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    Cited by:
    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.

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