January 7, 2008

Economists Ask: Deal or No Deal?

New Orleans — This year’s annual meeting of the American Economic Association, which wrapped up here on Sunday, had its share of sober panels on poverty, disease, climate change, and the American mortgage crisis. But there was also, perhaps inevitably, a session devoted to a certain ubiquitous game show.

On Sunday afternoon, scholars from three continents gathered to discuss Deal or No Deal, which has become a worldwide phenomenon since it had its premiere in the Netherlands in 2001. The show — in which contestants must decide whether to accept a firm cash offer or pursue an uncertain, potentially larger reward — has been catnip for economists because it acts as a laboratory of human risk-taking.

“The show offers real and large stakes, much larger than we’re able to offer in our own lab experiments,” said Morten Lau, a lecturer in economics at Durham Business School, in England. The sole drawback for scholars, Mr. Lau said, is that it’s often hard to know much about the contestants’ personal characteristics. (Another caution was raised by Sandra Maximiano, a graduate student at the University of Amsterdam, who wondered whether social pressure from the studio audience makes contestants’ behavior different from typical economic responses.)

The central question that interests economists here is: How do people behave under conditions of risk and uncertainty? Does their level of risk aversion remain constant, as so-called expected-utility theory predicts? Or does a person’s risk tolerance fluctuate across situations, as prospect theory predicts? If it fluctuates, does it do so in a predictable way?

In a paper scheduled to appear in the March issue of the American Economic Review, four scholars argue that contestants’ behavior in Deal or No Deal fits prospect theory much better than expected-utility theory. For example, if players receive a shock of bad news — if they open briefcases containing the highest rewards, which means that their own potential reward has sharply dropped — then they will typically become much more tolerant of risk in later rounds of the game.

At Sunday’s panel, three of that paper’s authors presented a follow-up study that compares contestants’ behavior across national editions of the game. The potential highest reward varies heavily from country to country. (In the Netherlands, the top suitcase is worth 5 million euros, whereas in Australia the top prize is 2 million Australian dollars, which is the equivalent of only 1.2 million euros.) The scholars found that contestants’ behavior is not heavily affected by those differences; local, situational effects within each game, not the absolute level of the potential prize, shapes a player’s risk behavior.

That paper’s statistical model was criticized by Glenn W. Harrison, a professor of economics at the University of Central Florida. Mr. Harrison said that he is excited about the world of Deal or No Deal studies, but he hasn’t been persuaded by the analyses he has read. “This is a subtle, inferential problem,” he said. “We’re just not ready yet to say that these patterns support prospect theory. Let’s just slow down.”

Susan K. Laury, an associate professor of economics at Georgia State University, said that she knows from personal experience that people’s risk tolerance can vary from situation to situation.

“I was over at the casino yesterday, and I doubled my stakes at roulette,” she said. “And yet today I insisted that we switch the order of the papers on this panel, so that I can get to the airport an hour and a half before my flight.” —David Glenn

Comments

1. At the close of World War II, there were wide-ranging debates about the future of economic developments. Historical experience has since shown that these forecasts were uniformly too pessimistic. Expectations for the American economy focused on the likelihood of secular stagnation; this topic continued to be debated throughout the post-World War II expansion. Concerns raised during the late 1960s and early 1970s about rapid population growth smothering the potential for economic growth in less developed countries were contradicted when during the mid- and late-1970s, fertility rates in third world countries began to decline very rapidly. Predictions that food production would not be able to keep up with population growth have also been proven wrong, as between 1961 and 2000 calories per capita worldwide have increased by 24 percent, despite the doubling of the global population. The extraordinary economic growth in Southeast and East Asia had also been unforeseen by economists. (NBER Working Paper No. 11125, February 2005, http://www.nber.org/papers/w11125)

   However, the outlook for the Desert Shield/IRAQ veterans (GULF WAR veterans as designated by Congressional Acts) may be less optimistic as direct competition by the Vietnam veterans. No other generation other than those who served in World War I and II have ever change the economy of the world. Fertility rates in the US will steady jump as more and more veterans return. The social pressure will come to a clash as a old versus new. The unborn generation of the United States will be directly threaten by the Vietnam era generation as this generation devours the resources causing a slow down of the economy. After Desert Shield/Storm, many veterans started families in many cases without health insurance because of “Pre existing medical condition clauses” whereby they were not eligible for health coverage. These clause were inserted by Vietnam era generation lawyers who felt the “economy” over well fair of the next generation of US citizens. “A woman life was less important than the economy” as one Vietnam veteran puts.

   The greatest attrition occurred among women who gave birth to a child between the beginning of the war and time of the survey, those reporting greater financial strain, and those holding a more negative view of military service as a result of their Gulf War experience. Analyses of open-ended questions provided the most frequent and critical reasons given by women who left military service following Desert Storm. (Penny F. Pierce, http://www.leaonline.com/doi/abs/10.1207/s15327876mp1003_4?cookieSet=1&journalCode=mp, 2007)

   The Chemical / Biological Exposures to our Troops have been established both, through sworn Congressional testimony & Official Government document’s that have verified these Chemical & Biological exposures that did in fact occur, & were not just isolated “incidents” as attested by thousand’s of Chemical Agent Alarms that were going off daily during the War, and throughout the entire Gulf War theater of Operations.
   (http://www.dsjf.org/,2007) All three children are also sick, and carry the “markers” which flag the cause of their illness as Gulf War infection, but none have been given the benefit of the latest treatment recommended for the disease. (http://www.usvetdsp.com/gws_jones.htm, 2007).

   Crude Oil is made of dead dinosaur who have bacteria and virus which have been around since the dawn of time. Even though exposure to the weapons war may be a contributing factor, the bacteria and virus of dinosaur may pose a direct threat to humans. Dinosaur were the supreme life form on the face of the earth before humans.

   As the Vietnam era (Baby boomers from 1958 to 1960) retire, most of these elder citizen are turning to perceive third world servants and health care provides. This opened the door to potential security flaws since many of the retires are also obtaining their money’s through high tech areas in commercial and government through contracts. OSAMA BIN laden has been rumored to be in and out the United States since 1960s. In many cases, he was a servants to many high tech and strategic people within the government and corporations. As of right now, many Vietnam Era citizens are recruiting from the younger generation for their cause leaving our unborn generation at risk.

   The dilemma which every young person may faces is “taking care of your children and future children” or taking care of your parents and grand parents. I have heard many of the “Vietnam Generation” personnel to take care of yourself first.” However, my time has come again at my age of forty because I am potently facing long term unemployment again even after getting a second master degree in technical area. I made a decision at the age of 26 to take an involuntary honorable separation to ensure I had medical insurance for my ex-wife and unborn daughter. I know I made the right decision for my self, however, several other of my comrades did not and face huge medical bills and even death of their love ones because of lack of proper medical insurance. If I had to chose sides, I chose my future generation.

   — Rogelio Gloria    Jan 7, 11:30 AM    #

2. Do the studies consider the selection process for contestants? It seems as if only a certain type of individual is selected to appear on the shows. One wouldn’t expect to see an individual with agoraphobia on the show, for example. It may just be that prospect theory best fits the Deal or No Deal subgroup, a sample selected to maximize ad revenue for a television network. I suspect that the results of the academic study speak more to which type of individual entertains us rather than how consumers actually make decisions.

   — Tony P    Jan 7, 04:36 PM    #

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