Risk Aversion When Gains are Likely and Unlikely: Evidence from a Natural Experiment With Large Stakes
Theory and Decision, Vol. 64, No. 2-3, pp. 395-420, March 2008
23 Pages Posted: 2 Apr 2006 Last revised: 13 Apr 2009
Date Written: 2008
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
Suggested Citation: Suggested Citation