3/19/2006

Deal or No Deal?

If you've seen NBC's new game show "Deal or No Deal", you may have quickly realized that it doesn't take an uncanny knowledge of history, art, and pop culture to strike it rich. So why does a show involving dumb luck have economists glued to the television? The Wall Street Journal indicates that behavioral economists have studied a variety of game shows in previous years; however "Deal or No Deal" has created particular excitement mainly because it involves no skill at all. This in turn reduces the variables when comparing subjects. "There is no doubt that these are real people making real choices for high stakes, and we rarely get to observe such pure decisions," says Richard Thaler, a leading behavioral economist at the University of Chicago Graduate School of Business. Why is it that most people will take $450,000 instead of a 50-50 chance at $1,000,000? For many economists questions like these reveal a great deal about risk aversion as well as other behavioral theories. So what would you do with a 50-50 shot at a million dollars: Deal or no deal?

7 comments:

bryce said...

That questions deals completely with an individuals aversion to risk. For myself, I would jump all over the $450,000, but I am a pretty risk adverse person. I think a lot of the people playing on the show are also risk adverse, but they get caught up in the atmosphere and hype of the audience. I also think they get caught up with the aspect of being on national TV and the television audience wants to see you take that risk. It would be interesting to see an individuals everyday risk aversion and then see how differently they acted when on the show. Who knows, maybe even I would go for the 50-50 chance.

Brooke said...

I have also watched this show, and the decisions I've seen people make are unbelievable. However, I may have watched on different nights because, to me, the contestants are not being as risk averse as they should be. I have watched people turn down sums of over $200,000 (an amount well over their yearly salary) only to walk away with $5,000. I agree that the audience and excitement of the show may make people act differently than they would in a reasonable situation. After all, who would honestly turn down $200,000 in cash if it didn't require any skill whatsoever? The mere chance at $1,000,000, regardless of the odds, will keep people playing the game.

Jake said...

I have watched this show one or two times. I hate the show because it requires no skill or knowledge, but I still watch it. It is interesting that if you pay close attention the bank's offer is higher than the player's statically probable gain.

Blake said...

Personally, I would take the $450,000 because I would rather have a guaranteed half million dollars, than have the chance of coming home empty handed, however I am somewhat risk averse, so maybe my opinion is biased.

Dr. Tufte said...

-1 on Jake's comment for spelling errors.

Ella is correct: it's really important to study things like this because it gets to the heart of how people make decisions in a really clean way. It is hard to understand why (say) people choose the stocks they do when we aren't yet sure how they make much simpler decisions like this. I have never seen this show, but I have done research using football betting for the same reason, and have had an idea using roulette on my back burner for years.

The problem with Bryce's point is in the real world people are much more likely to behave irrationally over small amounts than large amounts (so, the TV show, with big amounts is a good choice). There is something called the Allais' paradox, which is that people are typically risk-averse with large propositions and risk-loving with small ones. That's why people buy lottery tickets, and why casinos make most of their money off of small wagers.

Bryce: it is risk averse, not risk adverse.

Matthew said...

Dr. Tufte said that “people are much more likely to behave irrationally over small amounts than large amounts.” I agree with that statement. It seems that the percentage has something to do with it as well. For example, a coupon for 50 cents off a toothbrush seems more valuable than 50 dollars off a house. Another element may be the input/effort level regarding the money. If you work long and hard on a contract and are awarded $50,000, that's a lot of money. If you go on a game show for an hour and have the chance at a million dollars, $50,000 doesn't seem like much.

Dr. Tufte said...

Absolutely. This is a big area of research in microeconomics.