Testing the Predictions of Decision Theories in a Natural Experiment When Half a Million Is at Stake

Abstract

In the television show Affari Tuoi an individual faces a sequence of binary choicesnbetween a risky lottery with equiprobable prizes of up to half a million euros and anmonetary amount for certain. The decisions of 114 show participants are used to test the predictions of ten decision theories: risk neutrality, expected utility theory, fanning-out hypothesis (weighted utility theory, transitive skew-symmetric bilinear utility theory), (cumulative) prospect theory, regret theory, rank-dependent expected utility theory, Yaari’s dual model, prospective reference theory and disappointment aversion theory.nAssumptions of risk neutrality and loss aversion are clearly violated, respectively, byn55% and 46% of all contestants. There appears to be no evidence of nonlinear probabilitynweighting or disappointment aversion. Observed decisions are generally consistent withnthe assumption of regret aversion and there is strong evidence for the fanning-outnhypothesis. Nevertheless, we find no behavioral patterns that cannot be reconciled withinnthe expected utility framework (or prospective reference theory that gives identicalnpredictions).