nep-exp New Economics Papers
on Experimental Economics
Issue of 2006‒06‒10
three papers chosen by
Daniel Houser
George Mason University

  1. Testing the Predictions of Decision Theories in a Natural Experiment When Half a Million Is at Stake By Pavlo Blavatskyy; Ganna Pogrebna
  2. Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds By James J. Choi; David Laibson; Brigitte C. Madrian
  3. Who Really Wants to be a Millionaire : Estimates of Risk Aversion from Game Show Data By Hartley, Roger; Lanot, Gauthier; Walker, Ian

  1. By: Pavlo Blavatskyy; Ganna Pogrebna
    Abstract: In the television show Affari Tuoi an individual faces a sequence of binary choices between a risky lottery with equiprobable prizes of up to half a million euros and a monetary 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. Assumptions of risk neutrality and loss aversion are clearly violated, respectively, by 55% and 46% of all contestants. There appears to be no evidence of nonlinear probability weighting or disappointment aversion. Observed decisions are generally consistent with the assumption of regret aversion and there is strong evidence for the fanning-out hypothesis. Nevertheless, we find no behavioral patterns that cannot be reconciled within the expected utility framework (or prospective reference theory that gives identical predictions).
    Keywords: decision theory, natural experiment, television show, expected utility, nonexpected utility
    JEL: C93 D81
    Date: 2006–06
  2. By: James J. Choi; David Laibson; Brigitte C. Madrian
    Abstract: We report experimental results that shed light on the demand for high-fee mutual funds. Wharton MBA and Harvard College students allocate $10,000 across four S&P 500 index funds. Subjects are randomized among three information conditions: prospectuses only (control), summary statement of fees and prospectuses, or summary statement of returns since inception and prospectuses. Subjects are randomly selected to be paid for their subsequent portfolio performance. Because payments are made by the experimenters, services like financial advice are unbundled from portfolio returns. Despite this unbundling, subjects overwhelmingly fail to minimize index fund fees. In the control group, over 95% of subjects do not minimize fees. When fees are made salient, fees fall, but 85% of subjects still do not minimize fees. When returns since inception (an irrelevant statistic) are made salient, subjects chase these returns. Interestingly, subjects who choose high-cost funds recognize that they may be making a mistake.
    JEL: D14 D18 D43 D83
    Date: 2006–05
  3. By: Hartley, Roger (University of Manchester); Lanot, Gauthier (Queen’s University,); Walker, Ian (University of Warwick,)
    Keywords: Risk aversion ; gameshow
    JEL: D81 C93 C23
    Date: 2005

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