Prospect Theory (PT) and Constant-Relative-Risk-Aversion (CRRA) preferences have clear-cut and very different implications for the optimal asset allocation between a riskless asset and a risky stock as a function of the investment horizon.While CRRA implies that the Wire Strippers optimal allocation is independent of the horizon, we show that PT implies a dramatic and discontinuous "jump" in the Infant/Toddler Shoes optimal allocation as the horizon increases.We experimentally test these predictions at the individual level.
We find rather strong support for CRRA, but very little support for PT.