Wednesday, March 01, 2006

Deal or No Deal

Economists love this game show "Deal or No Deal." For those unfamiliar with the show here is Steve Levitt's description from the freakonomics blog:

On the show, contestants get a suitcase with some amount of money in it and they get to keep the contents or take a certain offer that some "banker" on the phone is offering. A good chance to test risk aversion. They even help the home audience by putting up some key numbers on the screen ("She has a 13% chance of winning a million dollars.") It is a great opportunity to test risk aversion at high stakes, subject to the distortion induced by being on national TV with a live audience screaming at you while you make your choices.

Here is his slightly different take:

Being a contestant on this show requires no talent whatsoever. You pick suitcases. You decide whether you prefer a riskless offer of money to a risky one. Then you go home with a bunch of money. Along the way, the crowd and your chosen friends scream and cheer like there is great skill in choosing among ex ante identical suitcases. Contestants beam with pride when they pick a good suitcase instead of a bad one. The whole thing has a veneer of skill, when really there is almost no skill at all.
Two graduate students, one here are Harvard the other from MIT, used the Italian version of the show to learn about risk aversion. You can read the paper here.

Given the potential power of social influences, I am curious how different individual's choices would be if they made their choice separate from their families and the crowd. It would be cool to randomly isolate some of the contestants and see if, and by how much, behaviors change. I encourage one of you motivated Harvard undergraduates to find one of the producers and get them to do this.

Update -- And if any of you should contact the producers, you should also pitch them something that will allow us to examine loss aversion. As is, no matter what happens in the game people leave with more money than they started with. I want there to be suitcases with negative amounts (i.e., if you end up with one of these you have to pay the show that amount). I want to see how risk averse people are when they might actually lose something. If you think it is somehow wrong to put people on a show where they might lose their own money, you could simply institute a first stage where the contestant gets paid just for coming on the show and the amount of the paycheck is the same as the maximum negative amount.

So I have to admit...When I watched this show when it first aired, I was with my brother and his wife...and during the show I took out my graphing calculator to compare the expected value of continuing with the banker's offer. Needless to say, my brother and his wife laughed at me for being a huge nerd. In any case, I found it pretty crazy how risk averse people really are (although it's mostly implicit).
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