Loss Aversion? Not With Half-a-Million on the Table!

Abstract

In the television show Deal or No Deal 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 is offered to exchange her box for another sealed box with the same distribution of possible monetary prizes inside. This offers a unique natural experiment for testing the predictions of expected utility theory versus prospect theory using lotteries with large stakes. While expected utility theory predicts that an individual is exactly indifferent between accepting and rejecting the exchange offer, prospect theory predicts that an individual should always reject the exchange offer due to the assumption of loss aversion. We find that the assumption of loss aversion is violated by 73%, 47% and 43% of contestants who receive exchange offers in the French, Italian and British version of the show respectively. Thus, contestants do not appear to be predominantly loss averse when dealing with lotteries involving large stakes.

Keywords: loss aversion, expected utility theory, prospect theory, natural experiment

JEL Classification: C93, D81