Risk Attitude in Real Decision Problems

Fabrizio Botti (), Anna Conte, Daniela Di Cagno and Carlo D'Ippoliti

The B.E. Journal of Economic Analysis & Policy, 2008, vol. 8, issue 1, 1-32

Abstract: We use data from 298 showings of the television program "Affari Tuoi," which involves contestants making decisions between risky prospects with possible prizes of up to half a million euros, to estimate three models of decision-making under risk: Expected Utility, Rank-Dependent Expected Utility and Regret-Rejoice. We find that Regret-Rejoice does not significantly improve upon Expected Utility, while Rank-Dependent outperforms it. Interestingly, we find that the CARA specification fits significantly better than the conventionally-adopted CRRA specification. Crucially, we find a significant role for unobserved heterogeneity, implying that our estimates provide more superior estimates of risk attitude and of probability weighting than other studies.

Date: 2008
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DOI: 10.2202/1935-1682.1798

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