Theory and Decision

, Volume 64, Issue 2–3, pp 395–420 | Cite as

Risk Aversion when Gains are Likely and Unlikely: Evidence from a Natural Experiment with Large Stakes

Article

Abstract

In the television show Deal or No Deal a contestant is endowed with a sealed box, which potentially contains a large monetary prize. 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.

Keywords

risk attitude risk aversion risk seeking natural experiment 

JEL Classification

C93 D81 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Allais M. (1953) Le Comportement de l’Homme Rationnel devant le Risque: Critique des Postulates et Axiomes de l’École Américaine. Econometrica 21: 503–546CrossRefGoogle Scholar
  2. Antonovics K., Arcidiancono P., Walsh R. (2005) Games and discrimination: lessons from The Weakest Link. Journal of Human Resources 40(4): 918–947Google Scholar
  3. Beetsma R.M., Schotman P.C. (2001) Measuring risk attitudes in a natural experiment: data from the television game show lingo. Economic Journal 111(474): 821–848CrossRefGoogle Scholar
  4. Bennett R.W., Hickman K.A. (1993) Rationality and ‘The Price Is Right’. Journal of Economic Behavior and Organization 21(1): 99–105CrossRefGoogle Scholar
  5. Berk J.B., Hughson E., Vandezande K. (1996) The Price Is Right, but are the bids? An investigation of rational decision theory. American Economic Review 86(4): 954–970Google Scholar
  6. Blavatskyy, P. and Pogrebna, G. (2006), Loss aversion? Not with half-a-million on the table!, available at IEW WP 274 http://www.iew.unizh.ch/wp/iewwp274.pdf.Google Scholar
  7. Bombardini, M. and Trebbi, F. (2005), Risk aversion and expected utility theory: a field experiment with large and small stakes, Unpublished manuscript, available at http://www.people.fas.harvard.edu/∼trebbi/BT_17nov2005.pdf.Google Scholar
  8. Botti, F., Conte, A., Di Cagno, D. and D’Ippoliti, C. (2006), Risk attitude in real decision problems, LUISS working paper.Google Scholar
  9. Cohen M., Jaffray J.-Y., Tanios S. (1985) Individual behavior under risk and under uncertainty: an experimental study. Theory and Decision 18: 203–228CrossRefGoogle Scholar
  10. Deck, C., Lee, J. and Reyes, J. (2006), Risk attitudes in large stakes gambles: evidence from a game show, University of Arkansas working paper.Google Scholar
  11. De Roos, N. and Sarafidis, Y. (2006), Decision making under risk in deal or no deal, available at SSRN: http://ssrn.com/abstract=881129.Google Scholar
  12. Di Mauro C., Maffioletti A. (2004) Attitudes to risk and attitudes to uncertainty: experimental evidence. Applied Economics 36: 357–372CrossRefGoogle Scholar
  13. Donkers B., Melenberg B., Van Soest A. (2001) Estimating risk attitudes using lotteries: a large sample approach. Journal of Risk and Uncertainty 22(2): 165–195CrossRefGoogle Scholar
  14. Friedman M., Savage L. (1948) The utility analysis of choices involving risk. Journal of Political Economy 56: 279–304CrossRefGoogle Scholar
  15. Gertner R. (1993) Game shows and economic behavior: risk taking on ‘Card Sharks’. Quarterly Journal of Economics 108(2): 507–522CrossRefGoogle Scholar
  16. Hershey J., Schoemaker P. (1980) Prospect theory’s reflection hypothesis: a critical examination. Organizational Behavior and Human Decision Processes 25(3): 395–418Google Scholar
  17. Kahneman D., Tversky A. (1979) Prospect theory: an analysis of decision under risk. Econometrica 47: 263–291CrossRefGoogle Scholar
  18. Levitt S.D. (2004) Testing theories of discrimination: evidence from weakest link. Journal of Law and Economics 47(2): 431–452CrossRefGoogle Scholar
  19. McGlothlin W. (1956) Stability of choices among uncertain alternatives. American Journal of Psychology 69: 604–615CrossRefGoogle Scholar
  20. Metrick A. (1995) A natural experiment in ‘Jeopardy!’. American Economic Review 85(1): 240–253Google Scholar
  21. Mukhtar A. (1977) Probability and utility estimates for racetrack betting. Journal of Political Economy 85: 803–815CrossRefGoogle Scholar
  22. Mulino, D., Scheelings, R., Brooks, R. and Faff, R. (2006), Is a dollar in the hand worth two in a lottery? Risk aversion and prospect theory in deal or no deal, Monash University working paper.Google Scholar
  23. Post, T., Van den Assem, M., Baltussen, G. and Thaler, R. (2004), Deal or no deal? Decision making under risk in a large-payoff game show, available at SSRN: http://ssrn.com/abstract=636508.Google Scholar
  24. Tversky A., Kahneman D. (1992) Advances in prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty 5: 297–323CrossRefGoogle Scholar
  25. Williams L., Paton D. (1997) Why is there a favourite-longshot bias in British racetrack betting markets?. Economic Journal 107: 150–158CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media LLC 2007

Authors and Affiliations

  1. 1.Institute for Empirical Research in EconomicsUniversity of ZurichZurichSwitzerland
  2. 2.Institute for Social and Economic Research and PolicyColumbia UniversityNew YorkUSA

Personalised recommendations