Testing the Predictions of Decision Theories in a Natural Experiment When Half a Million Is at Stake
AbstractIn the television show Affari Tuoi an individual faces a sequence of binary choices between a risky lottery with equiprobable prizes of up to half a million euros and a monetary amount for certain. The decisions of 114 show participants are used to test the predictions of ten decision theories: risk neutrality, expected utility theory, fanning-out hypothesis (weighted utility theory, transitive skew-symmetric bilinear utility theory), (cumulative) prospect theory, regret theory, rank-dependent expected utility theory, Yaari’s dual model, prospective reference theory and disappointment aversion theory. Assumptions of risk neutrality and loss aversion are clearly violated, respectively, by 55% and 46% of all contestants. There appears to be no evidence of nonlinear probability weighting or disappointment aversion. Observed decisions are generally consistent with the assumption of regret aversion and there is strong evidence for the fanning-out hypothesis. Nevertheless, we find no behavioral patterns that cannot be reconciled within the expected utility framework (or prospective reference theory that gives identical predictions).
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 291.
Date of creation: Jun 2006
Date of revision:
decision theory; natural experiment; television show; expected utility; nonexpected utility;
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-10 (All new papers)
- NEP-CBE-2006-06-10 (Cognitive & Behavioural Economics)
- NEP-EXP-2006-06-10 (Experimental Economics)
- NEP-FMK-2006-06-10 (Financial Markets)
- NEP-MIC-2006-06-10 (Microeconomics)
- NEP-UPT-2006-06-10 (Utility Models & Prospect Theory)
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