Every Econ PhD Student in the World Had His Tivo on Tonight

Or at least somebody should be taping this new game show Deal or No Deal so they can write a paper about it.

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.

My guess: the show will stay on the air long enough to generate enough data for an academic paper to analyze it, but not much longer.


wafonso

This particular game show has been on the air in Australia for several years already (http://seven.com.au/seven/dealornodeal ; also http://en.wikipedia.org/wiki/Deal_or_No_Deal)

The top prize is only A$200,000, though, and the odds of winning it are not explictly mentioned during the show.

kill_buddha

Yes Wafonso, but you must remember that Americans are like no other. If they sit down after work to watch a game show, only to find out that numbers are popping up on the screen and that weird "%" symbol is floating around....well, lets just say that unintelligible letters will be written.

kill_buddha

May I ponder...I've seen Freakonomics in every book store I've walked into, right by the front door. Dare we caculate the influx of new user profiles created for bloggers who are reciving the book as a Christmas gift?

drm7

I watched the last 1/3 of it last night. At first, I thought it was kind of dumb (the woman who was on stage was very irritating!) but I started to get swept up into the whole behavioral economics side of it. If you think fast enough, you can calculate the expected value of the payoff.

I think that the show also shines a huge spotlight on the concept of utility. At the end of the show, the woman had to choose betweeen a certain $72,000 payout or an uncertain payout with an expected value of >$150,000. The 'rational' choice is to hold out for the big payoff, but what if the contestant only makes $36,000 per year? I'm sure that two years' pay could do her a lot of good. On the other hand, a lawyer or investment banker might hold out for the big money, considering the 'loss' of $72,000 may not have any impact to their livelihood.

JanneM

drm7 is hitting the nail on the head. We are "risk averse" - in the sense that we value what we have much higher than what we may (or may not) achieve.

This is entirely rational, even according to game theory (which tends to miss social aspects). To put it another way, if your income is "low" (for some value of low), ~72000 is going to be worth a lot more than twice 2*72000 = ~150000.

To put it a third way, you see the 72000 as money you have, and figure out how much money you are prepared to lose on a bet with uncertain outcome.

gwidel_robber

The show format is brilliant. They advertise that they are making someone a millionaire, but in all likelihood no one will ever win the million. In the best-case scenario for the show someone will have a 50% chance of $.01 and $1,000,000. I don't think anyone is crazy enough to risk an offer of multiple hundreds of thousands of dollars for a coin flip of getting nothing. On the other hand if the contestant gets to the point where they have mostly high numbers left, chances are that they will just cash out before they get anywhere near getting $1,000,000.

It is also funny to notice how they offer different buyouts to people. One woman was offered a fair amount - she had a 50% chance of winning 300k so they offered her 150k to sell her chance of winning 300k. However another guy who said he was “unlucky” and was obviously distraught did not get a fair offer. He was getting offered 30k even though he had a 50% chance of making at least 100k.

Read more...

johnnyo

Another interesting game show was GSN's "Friend or Foe," in which pairs of players to split their winnings via a Prisoner's Dilemma-type game:

http://en.wikipedia.org/wiki/Friend_or_Foe%3F

Unfortunately it didn't last.

However, the game was not quite a pure Prisoner's Dilemma: if your partner voted "Foe" (defects) then your monetary payoff would be zero, regardless of how you vote... the "classic" Prisoner's dilemma would have a higher payout for (Foe/Foe) vs. (Foe/Friend), e.g. 25% of the pot to each player for (Foe/Foe).

Of course, I'm ignoring the possible psychic component of not wanting your partner to walk away with 100% of the winnings while you walk away with zero.

gtpost

The game was developed and first aired in the Netherlands in 2002, where it continues to run as a blockbuster. The money amounts there are even bigger than in the US, with a max of 5,000,000 euro. Erasmus School of Economics has a working paper on this show that reveals strong support for the behavioral "break-even-effect" of Thlaer and Johnson. See

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=636508

gtpost

The interesting thing about this show is that it uses a series of gambles and thus shows the effect of previous outcomes. In the Dutch episodes, many unfortunate contestants, who openend the valuable briefcases, reject bank offers in excess of the expected prize, i.e., behave as risk seekers (rather than risk averters). It would be interesting to see if this also happens with US contestants--or have the cowboys and cowgirls lost their risk appetite?

funferal

Risk aversion on television

The Freakonomics blog has had a number of posts about Deal or No Deal, a television show that had passed...

motorola razr cingular

motorola razr cingular

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Don't go surfing in South Dakota for a while.

aidah

good luck.....

wafonso

This particular game show has been on the air in Australia for several years already (http://seven.com.au/seven/dealornodeal ; also http://en.wikipedia.org/wiki/Deal_or_No_Deal)

The top prize is only A$200,000, though, and the odds of winning it are not explictly mentioned during the show.

kill_buddha

Yes Wafonso, but you must remember that Americans are like no other. If they sit down after work to watch a game show, only to find out that numbers are popping up on the screen and that weird "%" symbol is floating around....well, lets just say that unintelligible letters will be written.

kill_buddha

May I ponder...I've seen Freakonomics in every book store I've walked into, right by the front door. Dare we caculate the influx of new user profiles created for bloggers who are reciving the book as a Christmas gift?

drm7

I watched the last 1/3 of it last night. At first, I thought it was kind of dumb (the woman who was on stage was very irritating!) but I started to get swept up into the whole behavioral economics side of it. If you think fast enough, you can calculate the expected value of the payoff.

I think that the show also shines a huge spotlight on the concept of utility. At the end of the show, the woman had to choose betweeen a certain $72,000 payout or an uncertain payout with an expected value of >$150,000. The 'rational' choice is to hold out for the big payoff, but what if the contestant only makes $36,000 per year? I'm sure that two years' pay could do her a lot of good. On the other hand, a lawyer or investment banker might hold out for the big money, considering the 'loss' of $72,000 may not have any impact to their livelihood.

JanneM

drm7 is hitting the nail on the head. We are "risk averse" - in the sense that we value what we have much higher than what we may (or may not) achieve.

This is entirely rational, even according to game theory (which tends to miss social aspects). To put it another way, if your income is "low" (for some value of low), ~72000 is going to be worth a lot more than twice 2*72000 = ~150000.

To put it a third way, you see the 72000 as money you have, and figure out how much money you are prepared to lose on a bet with uncertain outcome.

gwidel_robber

The show format is brilliant. They advertise that they are making someone a millionaire, but in all likelihood no one will ever win the million. In the best-case scenario for the show someone will have a 50% chance of $.01 and $1,000,000. I don't think anyone is crazy enough to risk an offer of multiple hundreds of thousands of dollars for a coin flip of getting nothing. On the other hand if the contestant gets to the point where they have mostly high numbers left, chances are that they will just cash out before they get anywhere near getting $1,000,000.

It is also funny to notice how they offer different buyouts to people. One woman was offered a fair amount - she had a 50% chance of winning 300k so they offered her 150k to sell her chance of winning 300k. However another guy who said he was "unlucky" and was obviously distraught did not get a fair offer. He was getting offered 30k even though he had a 50% chance of making at least 100k.

Read more...

johnnyo

Another interesting game show was GSN's "Friend or Foe," in which pairs of players to split their winnings via a Prisoner's Dilemma-type game:

http://en.wikipedia.org/wiki/Friend_or_Foe%3F

Unfortunately it didn't last.

However, the game was not quite a pure Prisoner's Dilemma: if your partner voted "Foe" (defects) then your monetary payoff would be zero, regardless of how you vote... the "classic" Prisoner's dilemma would have a higher payout for (Foe/Foe) vs. (Foe/Friend), e.g. 25% of the pot to each player for (Foe/Foe).

Of course, I'm ignoring the possible psychic component of not wanting your partner to walk away with 100% of the winnings while you walk away with zero.

gtpost

The game was developed and first aired in the Netherlands in 2002, where it continues to run as a blockbuster. The money amounts there are even bigger than in the US, with a max of 5,000,000 euro. Erasmus School of Economics has a working paper on this show that reveals strong support for the behavioral "break-even-effect" of Thlaer and Johnson. See

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=636508