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Saturday, October 18, 2008

Bounded Rationality and The Price is Right

I just read a really great paper by Jonathan Berk and Eric Hughson called "Can Boundedly Rational Agents Make Optimal Decisions? A Natural Experiment."  The Berk and Hughson examine a sample of games on the game show The Price is Right to see whether contestants make optimal bidding decisions. 

The two games they consider are Contestants' Row (where you bid on the price of the prizes - whoever gets closest to the price without going over wins).  The second is the Wheel Spin - whoever gets closest to 100 wins.   You must win on Contestants' Row to get to the Wheel Spin.

Their results are interesting - they find that a large percentage (nearly 50%) of relevant bidders on Contestants' Row bid suboptimally - in other words, they don't bid $1 over one of the other bidders.  This result is interesting, because that strategy is pretty easy to figure out.  At the same time, about 95% of Wheel Spinners spun optimally, despite the fact that the Wheel Spin decision is a much more complex decision.  In otherwords, a large portion of contestants were irrational in the easy game and highly rational in the difficult game.

Some comments on the implications and on the reasons follow the jump.

The implications of the study are important for  the study of behavioral economics (or law & economics).  If bounded rationality is divorced from the difficulty of the decision, it makes it much more difficult to model behavior in any predictable manner.  I suppose that the non-economist answer to that is "Duh!"

Berk and Hughson discuss possible reasons for the phenomenon they observe, such as learned behavior (both in the course of the game and from watching on television) and irrational focus on the prize value in the bidding game.

I have a couple of comments that they don't address.  First, while the discuss the Wheel Spin bonus if you hit exactly 100 and dismiss it as something that doesn't affect optimal behavior, they don't discuss the $500 bonus one wins if he or she bids the exact prize value on Contestants' Row.  In other words, it may be optimal to bid more than $1 over the next closest bidder when shooting for the bonus.

This leads to a second possible explanation, though I'm not sure how I would categorize it.  Contestant's Row is a guessing game that involves human estimation skills.  As a result, participants (at least some of them) may have faith in their estimation prowess in hitting the exact number.  As a result, they may not view these suboptimal decisions as irrational; instead, they believe they can find the right answer.

The Wheel Spin, however is all random and everyone knows it.  Contestants have no illusion that their special spinning skills will somehow get them to 100.  I suspect that if any modicum of skill were involved in the Wheel Spin, we would see a lot more suboptimal behavior in people trying to go for the bonus.

In any event, this is an interesting short article worth a look.

H/T: Legal Theory Blog

Posted by Michael Risch on October 18, 2008 at 09:07 AM in Legal Theory | Permalink


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Wouldn't the more-optimal bidding in the Wheel Spin be the product of natural selection? That is, wouldn't we expect those participating in the Wheel Spin (i.e., those who have been successful at the game) to be more optimal bidders in the first place?

Posted by: Aaron Williams | Oct 20, 2008 1:52:42 PM

Another point: we actually DO see quite a few wheel spinners going "strategically" for the bonus, as opposed to just playing the odds and taking their chances on getting as close as possible to $1. The catch is that the rules of the game say the wheel must go around at least one complete time -- possibly to prevent this exact gaming of the system (pun intended). Thus, when spinners try to spin for an exact amount to make their two spins total $1, and their strategic spin results in less than one complete revolution, the spinners are perceived as cheaters and are booed relentlessly. And the audience is savvy: they will not boo an elderly person whose spin fails to make a complete revolution. It is a fascinating phenomenon, and again points to social norms at work.

If I had to guess, I would say this attempted optimal spinning happens at least once every 9 spinners (every show-and-a-half), if not more frequently. (I confess: I watch daily. It's my guilty pleasure. I've even been in the studio audience, but I never made it to contestant's row.)

Posted by: JM | Oct 19, 2008 12:37:36 PM

I agree with JL. I think norms against harming a particular opponent are operating here. Bidding $1 over is an aggressive move that specifically targets one opponent to their detriment. I'd be willing to bet that being seated next to the target decreases the likelihood of bidding $1 over. Spinning the wheel again, by contrast, is not targeted at anyone in particular, and so seems less aggressive.

Another theory (I haven't looked at the paper, although I've downloaded it -- does that count?) is that we're dealing with potential repeat play in the bidding process, and even the last player could lose and then be subject to tit-for-tat retaliation.

Posted by: Bruce Boyden | Oct 18, 2008 11:26:29 PM

JL - the reason they picked the Price is Right is that there is real money at stake - the likelihood of playing poorly to "look good" is decreased if it increases chances of losing. Also, if this were a factor, why do people get it right on the Wheel Spin? Wouldn't they want to be good sports there too?

PW - they do look only at the fourth bidder - I didn't make that clear.

Posted by: Michael Risch | Oct 18, 2008 4:02:42 PM

It also invites the next contestant to bid $1 more than you. For this reason, perhaps the only contestant on contestant's row who should be evaluated is the final bidder.

Posted by: PW | Oct 18, 2008 3:48:30 PM

You missed one important reason people behave suboptimally on contestant's row: unwritten rules and reputation effects. If you bid only $1 over the previous bidder, yes, you are playing by the official rules. But this is unsporting. It looks bad, both to the general public who are watching you on TV, and to the specific competitors whose chances you have just eliminated.

Posted by: JL | Oct 18, 2008 2:43:58 PM

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