Working Paper: CEPR ID: DP1893
Authors: Roel M.W.J. Beetsma; Peter C. Schotman
Abstract: We use data from a television game show, involving elementary lotteries and substantial prize money, as a natural experiment to measure risk attitudes. We find robust evidence of substantial risk aversion. As an extension, we esimate the various models using transformations of the ?true? probabilities to decision weights. The estimated degree of risk aversion increases further, while players tend to overestimate substantially their chances of winning. Constant Relative Risk Aversion (CRRA) and Constant Absolute Risk Aversion (CARA) utility specifications perform approximately equally well, with CARA having the advantage that the players? decisions do not depend on their initial wealth.
Keywords: Lingo; Risk Aversion; Expected Utility; Decision Weights; Natural Experiments
JEL Codes: C90; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| players' decisions in the game show Lingo (C78) | measurement of risk attitudes (D81) |
| players exhibit substantial risk aversion (D81) | coefficients of relative risk aversion estimated between 6 and 12 (D11) |
| players stop playing when survival probabilities fall below a certain threshold (C73) | reflection of their risk attitudes (D81) |
| players systematically overestimate their chances of winning (D80) | transformation of true probabilities into decision weights (D79) |
| transformation of true probabilities into decision weights (D79) | increased estimates of risk aversion (D11) |
| degree of risk aversion increases with reference wealth level (D11) | context and stakes influence players' decisions (D91) |