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Thursday, April 20, 2006

The Behavioral Economics of "Deal or No Deal"

A pair of economists from Yale and the University of Sydney have posted this paper, titled "Decision Making Under Risk in Deal or No Deal," on SSRN.  Here's the abstract:

We analyse the choices of 399 contestants in the Australian version of the television game show Deal or no Deal. As a first pass at the data, we calculate risk-aversion bounds for each contestant, revealing considerable heterogeneity. We then estimate a structural stochastic choice model that captures the dynamic decision problem faced by contestants. To address individual heterogeneity, we nest the dynamic problem within the settings of both a random effects and a random coefficients probit model. Our structural model produces plausible estimates of risk aversion, confirms the role of individual heterogeneity and suggests that a model of stochastic choice is indeed appropriate. We also examine generalisations to expected utility theory, finding that the rank dependent utility model provides substantially improved explanatory power. Finally, we do not find strong evidence in favour of an endowment effect for lotteries.

Sounds very interesting.  But how do you solve for Howie Mandel?

Posted by Paul Horwitz on April 20, 2006 at 03:20 PM in Article Spotlight | Permalink

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Comments

And all these years, I thought the question was, "How do you solve a problem like Maria?"

Posted by: Joseph Slater | Apr 20, 2006 3:38:45 PM

For those who are interested, a similar but more comprehensive study by Chicago econ Dick Thaler and European scholars is this one (by the way, how does such a paper get Abstract Views: 15440 Downloads: 2289 so quickly? is it the Thaler name?):
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=636508

Deal or No Deal? Decision Making Under Risk in a Large-Payoff Game Show

THIERRY POST
Erasmus University Rotterdam (EUR) - Erasmus School of Economics; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM); Tinbergen Institute
MARTIJN J. VAN DEN ASSEM
Erasmus University Rotterdam (EUR) - Erasmus School of Economics
GUIDO BALTUSSEN
Tinbergen Institute/ Erasmus University Rotterdam (EUR); Erasmus University Rotterdam (EUR) - Erasmus School of Economics
RICHARD H. THALER
University of Chicago - Graduate School of Business; National Bureau of Economic Research (NBER)
--------------------------------------------------------------------------------
April 2006



Abstract:
The popular TV game show “Deal or No Deal” offers a unique opportunity for analyzing decision making under risk: it involves very large and wide-ranging stakes, simple stop-go decisions that require minimal skill, knowledge or strategy, and near-certainty about the probability distribution. We examine the choices of 84 contestants from Belgium, Germany and the Netherlands. In contradiction with expected utility theory, choices can be explained in large part by the previous outcomes experienced by the contestants during the game. Most notably, risk aversion decreases strongly after earlier expectations have been shattered by unfavorable outcomes, consistent with the “break-even effect”. Our results point in the direction of frame-dependent choice theories such as prospect theory and suggest that phenomena such as framing and path-dependence are relevant, even when large real monetary amounts are at stake.



Posted by: Orly Lobel | Apr 23, 2006 1:08:40 AM

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