MAY 2006 :: ECONOMICS

What's in a Game?
Watching 'Deal or No Deal' Helps Economists Learn How People Make Decisions

By Charles Forelle
Staff Reporter of The Wall Street Journal

Daryl Johnson, a 27-year-old actor and freelance Web designer-"which means I don't have a job"-was standing nervously on the NBC game show "Deal or No Deal."

After disappointing rounds that dashed Mr. Johnson's hopes of walking away a millionaire, the host, Howie Mandel, offered him $37,000 to quit. Mr. Johnson still had a one-in-five shot at winning a briefcase with $200,000 hidden inside. So he turned down the $37,000.

Later, with a one-in-three chance left of winding up with the $200,000, Mr. Johnson was offered $67,000 to give up. He rubbed his hands. He drummed his fingers on his chest. He shook his head no. The audience hooted. "You're very gutsy," Mr. Mandel said.

To Thierry Post, a finance professor at Erasmus University in the Netherlands, Mr. Johnson is also a valuable subject in economics research. "His risk appetite is really abnormal," the professor says of Mr. Johnson. More precisely, he calculates, Mr. Johnson displayed a "relative risk aversion" measure of 0.006-completely indifferent to financial risk.

Real People, Real Choices

Mr. Post is part of a small group of economists who study game shows, seeking to explain the situational choices contestants make, and the clues those choices may hold for economic behavior in everyday life.

Other shows that have been studied include "Who Wants to Be a Millionaire" and "Jeopardy!" But "Deal or No Deal" has created particular excitement among economic researchers, in part because it involves no skill whatsoever. That reduces the variables when comparing subjects.

"There is no doubt that these are real people making real choices for high stakes, and we rarely get to observe such pure decisions," says Richard Thaler, a leading behavioral economist at the University of Chicago Graduate School of Business.

Mr. Post is studying the show to see whether it might help explain why people make irrationally risky economic decisions.

He and his colleagues have recorded dozens of episodes. They've traded online with TV-show collectors around the world and have even hired Turkish-speaking students to transcribe data from Turkey's version of the show.

How risk affects financial behavior influences such important matters as deciding which assets to put in an investment portfolio and how much governments should spend on social programs. But actual data on people's risk tolerance are hard to come by. Giving away millions of dollars to subjects of an experiment would be "hard to justify to the National Science Foundation" and others who fund research, says Ian Walker, a professor at the University of Warwick in England, who has studied "Who Wants to Be a Millionaire."

"Deal or No Deal" works like this: Twenty-six models each hold a briefcase that contains a sum of money-varying from one cent to $1 million in the U.S. game. The contestant picks one briefcase as his own and then begins to open the other 25, one at a time-and by process of elimination, reveals a little more about what his own case might hold. At the end, the contestant can also trade his briefcase for the last unopened one.

Suspense builds-and the contestant's chance of a big payoff grows-when small sums are eliminated and the $1 million or $750,000 cases remain unopened and winnable. Periodically, as cases are eliminated, a "banker" calls the host to offer the contestant a deal with a certain amount of money. The proposal is to stop playing now and take the money offered, or continue to take a chance with the briefcases.

With family members offering advice from the sidelines and the audience hooting, the contestant must decide: deal or no deal?

What interests Mr. Post is how contestants respond to these banker offers, which fluctuate based on which dollar sums remain winnable. If the $1 million and $500,000 briefcases are left, for instance, the banker's offer will be far higher than if they aren't.

This can create anguishing scenarios. What to do if the last two briefcases hold $1 million and $10, and the banker offers $450,000? The contestant has a 50-50 chance at a million. Probability theory says his "expected value" is the average of the two unopened briefcases, or $500,005. Classical economic theory says that people with relatively small net worth, those who are not likely to see a $450,000 check ever again, would take it. Behavioral economists say that isn't always the case.

'Prospect Theory'

In this game, there are no trivia questions, no vowels to buy, no wheels to spin. Decisions involve only dollars, and contestants have just one choice at each juncture: Is it a deal or no deal? "You are a complete moron" if you don't understand the show's simple pattern, says Mr. Post. It is thus "a dream come true for any behavioral economist."

Studying 53 episodes of the Dutch and Australian shows, Mr. Post finds that some contestants behave as the classical model predicts, locking up a sure payoff rather than risking it even with favorable odds. But others don't. The distinguishing factor, Mr. Post's data show: Players take more risks if they suffer setbacks early in the game, such as opening the million-dollar briefcase. That supports "prospect theory." Prospect theory holds that people evaluate prospects for gains and losses from psychological reference points that may shift over time (like an early setbacks in the game) instead of seeking to maximize the "utility" they receive from money under a rigid formula.

In "Deal or No Deal," Mr. Mandel says, the most surprising moment so far came when Karen Van, a self-described "sexy grandma," turned down $138,000 and ended up with a $25,000 prize. Ms. Van says her husband, who was in the studio audience, egged her on.

Mr. Johnson, the actor and freelancer who turned down eight deals, was faced with an ultimate choice between two briefcases. He knew that one contained $200,000, and the other $50, but he didn't know which was which. The banker offered him $99,000 to quit.

"I'm no damn fool!" Mr. Johnson exclaimed. "Deal!"

In an interview, Mr. Johnson said he had, indeed, been gambling in the earlier rounds. Still, he wasn't going to go all the way.

"Fifty dollars is a gas tank," he said.