Expected Utility Theory and Prospect Theory

I have heard of Deal or No Deal but I have never understood the premise of the game until now. The game seems like a practice in risk aversion. People make decisions and choices based on whether or not they have something to lose or whether they have enough resources and probability. In order to get a good grasp on the game, I played it a few times. In the first pass, I did not really understand what was going on. By the time I made a second pass at the game, I had an understanding of how to play. By the third pass, I was better able to make informed decisions.

My decisions were mainly based on how many resources I had on each side. If I had more resources on the right side available, I kept playing without making a deal. In the pass where I had fewer resources on the right side than the left, I opted to make a deal. The probability that I would have the briefcase that contained a high dollar value was slim. After playing the game several times, most of my decisions were risky. The second game was the only time I was risk averse and it was because I was still trying to understand the game. The way I made decisions while playing conformed to expected utility theory. I made a decision by comparing the expected utility values (Hastie & Dawes, 2010). Also, in looking at the different resources, I weighed the number values as well. I had to figure out what the probability was that I would have one of the hundred thousand dollar briefcases versus a lower number. Therefore, when the banker called and offered a high number, I was okay with declining.

I do not believe I am risk averse. One of my mottos is that nothing interesting happens to people who do not take chances. Some of the best experiences in my life have come from taking a chance and doing things that other people normally would not do. However, taking risks is sometimes necessary. By leaving your house and getting in a car and driving to work on a daily basis, you’re taking a risk. This is something I do everyday like most other people. It can be argued that there is a 1 and 50,000 chance per year that you will be killed in a car accident. As someone who rides a motorcycle, that number is higher. Motorcyclists are 35 more times likely to experience a deadly accident than a passenger vehicle. Despite knowing this information, I still ride.

References

• Hastie, R., & Dawes, R. M. (2010). Rational Choice in an Uncertain World. SAGE. ↩

Tables

Table 1

Deal or No Deal

My Choice	What I was thinking	My Decision	The Outcome
$2000	I’m just getting started. No.	No deal.
$8000	There are still plenty of briefcases left.	No deal.
$10000	Still plenty of briefcases.	No deal.
$20000	The number of briefcases on the right (high dollar value) outweigh the number on the left.	No deal.
$107000	More on right than left.	No deal.
$108000	Almost eliminated all on left.	No deal.
$56000	My ratio is 2 to 3. Keep playing.	No deal.
$125000	I have two briefcases left. There’s a chance I’ll get $10 or $500,000.	No deal.	My briefcase contained $500,000