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.…show more content… In order to continue playing the game and rejecting the bankers offers, the contestant relies on the assumption that they have chosen the one million dollar case at the beginning of the game. If they did not believe that, they would theoretically accept the offer, as with individuals trading on the stock market. Investors buy a security because they believe it is a winner; they continue to hold on to it at times even when it decreases below their initial investment, because they have convinced themselves that they know better than most and that the stock will increase to their perceived value of it.
2. Cognitive Dissonance Bias This heuristic has multiple applications in the game show. The first of which occurs when the contestant is presented with an offer and rejects it, only to get rid of high valued cases followed by a lower offer from the banker. A rational individual would realize that their potential payout/gains are rapidly diminishing and consider taking the offer. Cognitive dissonance presents itself through two separate and opposing ideas. On the one hand the contestant maintains that they have chosen to save the one million dollar case, yet on the other hand, the evidence begins to imply that perhaps they are not as “good” at choosing the proper cases as they had originally thought. Investors are frequently faced with cognitive dissonance, balancing their belief that they have well performing
