Testing the Predictions of Decision Theories in a Natural Experiment When Half a Million Is at Stake

Pavlo Blavatskyy and Ganna Pogrebna

No 291, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: In 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).

Keywords: decision theory; natural experiment; television show; expected utility; nonexpected utility (search for similar items in EconPapers)
JEL-codes: C93 D81 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-fmk, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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