Small and Large-Scale Monetary Gambles and Behavioral-Preference Approaches

Abstract

We investigate different behavioral-preference approaches. Our purpose is to examine the performance of the behavioral-utility models in explaining investor's attitudes towards small and large-scale monetary gambles. Based on data of the Deal or No Deal TV game show, we assess the performance of the loss-aversion model and the cumulative prospect theory model. We find that cumulative prospect theory model present a better performance since it introduces in the contestant utility a probability weighting function. We also explore the performance of two others models of the rank-dependant utility namely the Quiggin (1982) and the power probability weighting models. We show that both models outperform the loss aversion model with a linear probability function.