Posts filed under “Psychology”

Innumeracy is alive and well and living in the USA

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
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

Category: Economy, Psychology

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Category: Investing, Psychology

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Category: Investing, Markets, Psychology

P/E Expansion and Contraction

Category: Investing, Markets, Psychology

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Category: Psychology

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Category: Markets, Psychology, Technical Analysis, Trading

P/E vs S&P 500 (50 Years)

As promised, today brings us to the 4th in our series of charts: P/E vs S&P500 click for larger chart courtesy of Mike Panzner, Rabo Securities > I’ll get into the significance of what this means to the markets later, but for now, note where the P/E is over the median, and its impact on…Read More

Category: Earnings, Markets, Psychology, Technical Analysis

100 Year Dow Jones Industrials Chart

Have a look at this 100 year (actually, 105-Year) chart. I colored each “Market” appropriately — Green for Bull, and Red for Bear — to more clearly show what happens. Bull markets get ahead of themselves. At their ends, they tend towards excesses that take a very long while to recover from. When a long…Read More

Category: Markets, Psychology, Technical Analysis

How Blind Are We to Our Own Shortcomings?

Category: Apprenticed Investor, Psychology

Stuff Doesn’t Make You Happy . . .

Category: Psychology