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Innumeracy is alive and well and living in the USA

Posted By Barry Ritholtz On January 12, 2006 @ 8:16 am In Economy,Psychology | Comments Disabled

Front page WSJ  story on a new game show:

"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, each time, by process of elimination, revealing 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 hitting it big grows — when small sums are eliminated and the \$1 million or \$750,000 cases remain unopened and winnable. Periodically, as cases are eliminated, an ominously shrouded "banker" offers a deal conveyed to the contestant by Mr. Mandel. The proposal is: Stop playing now and take the money offered.

What interests Thierry Post, a professor of finance at Erasmus University in Rotterdam, the Netherlands, is how contestants respond to these offers, which are related to which dollar sums remain winnable. If the \$1 million and \$500,000 briefcases are left, for instance, the 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, likely never again to see

Its funny — we were just discussing this last month, and I put it in my TiVo queue to record. I only saw one show itself is slow and boring, requires no particular skill — other than statistical analysis. The real interesting phenomena is watching ordinairy people deal with basic mathematics.

Source:
Why Game Shows Have Economists Glued to Their TVs [1]
For Researchers, Players Shed Light on Decision Making;
Mr. Johnson’s ‘Gutsy’ Move

CHARLES FORELLE
WSJ, January 12, 2006; Page A1
http://online.wsj.com/article/SB113703499178844535.html