chapter  3
12 Pages

Risk and risk aversion

A popular game show, which originated in the Netherlands with the name “Miljoenenjacht”, asks players to choose one of 26 briefcases. Each case has an unknown amount of money within it. The player knows the possible amounts of money in the cases, and is hoping for a large value inside the case they choose. The object of the game is to pick and thus eliminate cases in such a way that the remaining money amounts, which become better known with each subsequent player choice, provide the player with a large expected value of winnings. At specific intervals, a “banker” offers the player money to purchase their initial case choice and end the game. In theory, the offers should follow the expected value of winnings as cases are chosen. The lower the offer versus the expected value of the remaining cases, the less likely the player will stop pursuing the higher value cases that remain. In theory, as a reaction to the banker’s offer, the player assesses the expected value of the remaining case amounts versus the bank’s offer. The player decides to take the offer or continue playing, taking or not taking the deal. This game show is known as “Deal or No Deal” in the United States and elsewhere for this reason.