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. 

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

WSJ, January 12, 2006; Page A1

Category: Economy, Psychology

Dow Jones pulls a fast one . . .

Category: Financial Press

Read it Here First: Iraq war could top $2 trillion

Category: Economy, War/Defense

Who’s Dropping Out of Labor Force

Category: Employment

Employment Recovery Continues to be Sub-par

Category: Economy, Employment

Astonishingly Irresponsible Headlines

Category: Financial Press

Consumer Spending and Housing Correlation

Category: Economy, Real Estate, Retail

Dow 11,000

Category: Technical Analysis

Bill Gross Bond Timing Tool

Category: Economy, Fixed Income/Interest Rates

New Column: CULT OF THE BEAR, part II

Category: Investing, Markets, Technical Analysis