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Using the popular TV show Deal or No Deal, researchers investigate the effect that being in the limelight has on people’s decisions in scenarios involving risk.

Deal or No Deal is extraordinarily well suited to analysing how people choose between alternatives that involve risk. As it turns out, behaviour in the game deviates sharply from traditional accounts of risky choice and is well captured by prospect theory, a psychologically plausible description of decision-making co-developed by Nobel Prize winner Daniel Kahneman.

Researchers from the University of Nottingham, VU University Amsterdam and Erasmus University Rotterdam conducted incentivised experiments based on the Deal or No Deal format. All contestants (students) could either accept a cash offer or hold out for a mystery amount hidden in a box pre-selected at random. Prize money ranged from €0.01 to €500 – compared to the spread of 1p to £250,000 used in the UK version of the show.

Contestants either played on private computer terminals in a laboratory setting or in a simulated game-show environment with an audience, a host and cameras.

Results showed that transparency increases fears of losing – leading to excessively cautious decisions that overweight potential losses relative to potential gains. Lab-based contestants demanded a much higher offer than those who played in the game-show setting before agreeing to deal. Players in the limelight have a greater fear of losing, relative to earlier expectations, if the risky gamble does not pay off.

Dennie explains that; “In essence, what this means is that our subjects found the limelight constraining and anonymity liberating. Contrary to the widely held notion of “playing to the crowd”, being forced to make decisions in public did not promote a devil-may-care, audience-pleasing attitude: rather, it heightened the fear of losing after going out on a limb”.

Studies by other research teams focusing on investor behaviour corroborate the findings. In short, more scrutiny means more cautious decisions, as people try extra-hard to avoid losses. Those who believe the financial industry has been taking too much risk may see this as desirable, but at the same time it is vital to remember there is no profit without risk.

Calls for more transparency in the financial industry remain entirely understandable. Dennie says; “Transparency will always be important, but the economy doesn’t benefit from a financial sector that’s overly bureaucratic and unduly timid. The bottom line – figuratively and literally – is that the overcautious decisions that too much transparency encourages may ultimately harm our economic well-being.”

The study referenced here is ‘Risky Choice in the Limelight’ by Dr Dennie van Dolder, co-authored with Martijn van den Assem of VU University Amsterdam and Guido Baltussen of Erasmus University Rotterdam.

Posted on Tuesday 16th June 2015

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