Behavioural Finance: Deal or No Deal? Who Wants to Be a Millionaire?

1986 Words Jan 30th, 2013 8 Pages
Behavioural Finance - Erin McCall
Who Wants To Be A Millionaire? Deal Or No Deal?

WHO WANTS TO BE A MILLIONAIRE?

1) The risk averse investor would accept the safety level of $500,000 because they would refuse to accept any risk. The risk neutral investor would have been indifferent had the expected payout for both options been equal however, given that the expected payout for the guess is higher than that of the sure thing the risk neutral investor would choose to guess. The risk lover investor would always choose the option pertaining to the most risk and therefor choose to guess.

2) The expected value of the guess is $15 million [(0.5 x 30M) + (0.5 x 0)]. However, the actual outcome will either be $30 million or $0.
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However, for risk averse individuals it is based on the marginal utility associated with the additional return for that risk. That is why financial position prior to the opportunity, or income, are the most dominant determinants for most individuals.
Most rational individuals may recognize that they could invest the guaranteed $10,000,000, in low risk investments, and eventually triple their money to yield the same gains as the risky $30,000,000 option. DEAL OR NO DEAL

Deal or no deal is a game that consists of several rational behavioral anomalies. According to Kahneman and Tversky, prospect theory suggests that the average human being is risk averse with regards to financial gains and losses, thereby implying that they would take the sure thing, in this case the deal, if presented with it. If that were true, the show wouldn’t be such an international hit. The television show’s contestants display several behavioral biases, which have attributed to the shows success. The biases discussed below apply to both the contestants as well as the population involved in trading in the stock market. However, it is essential to consider that the biases that are based and driven by the assumption that a contestant can be talented at choosing cases, are not as irrational with regards to stock market traders given that they can be talented at choosing which stocks to