A Game Show, Transparency and Risk Aversion

Remember the Fawlty Towers episode where a slice of veal that may or even may not have been coated with rat poison is rescued in the kitchen floor and prepared for that plate of a visiting health inspector? “What the eye don’t see,” chirps Basil’s ever-insouciant cook, whilst casually dusting down the offending cutlet, “the chef gets aside with.”

Many feel that a similar viewpoint has too often been applied in the world of finance. Accordingly, the financial industry faces mounting pressure in order to submit to greater public analysis. Naturally, little or no transparency is really a bad thing. However, might the same also be said about an excessive amount of transparency?

Psychology of decision-making

Given that it involves the psychology of decision-making and costly financial repercussions, this issue is definitely an interesting one for behavioural economists. One question associated with fundamental significance is the relationship between openness, anonymity and the degree to which people are prepared to take risks.

This brings us to another TV classic. It might not very rank alongside Fawlty Towers, but when it comes to illustrating how people behave under pressure for financial reward it is perhaps more instructive than Basil’s most maniacal turns.

Deal or No Deal, like many simple ideas, can be extremely revealing. The TV show, where contestants must pick one of 22 identical containers with a range of prizes (through 1p to £250,000) inside, offers a good illustration of prospect theory. This theory, produced by Daniel Kahneman and Amos Tversky, gives a psychologically plausible description of how people help to make risky choices. You may not realize it, but when you are watching Deal or No Deal, you’re getting some fantastic insights into how people choose between probabilistic options that involve risk.

In the study Recently i completed with colleagues in Amsterdam and Rotterdam, we conducted experiments which mimicked the Deal or No Deal format. The general concept was to find out how being in the actual limelight affects an individual’utes attitude to risk.

Risk takers

As using the TV programme, contestants could either accept a known cash offer from an mythical “banker” or hold out for a secret amount contained in a box they pre-selected at random at the start of the game. The prize money varied from €0.01 to €500. Students played the sport either in a laboratory atmosphere on a private computer terminal or in a simulated game-show environment with an audience, a host, and digital cameras. This way we could see how people acted in different circumstances.

We discovered that players in the game show environment demanded a considerably lower provide before agreeing to a deal. The actual apparent reason for this was that they had a greater fear of losing, relative to earlier expectations, if the risky gamble did not pay off.

Many might consider this surprising. After all, there is a popular conception that participants on game shows tend to play to the audience in the hope they will be thought of as entertaining. Nevertheless, our results suggest this is not so.

On the contrary, our subjects found being in the actual limelight comparatively constraining and anonymity comparatively liberating. In other words, making decisions in public does not motivate us to show off: rather, it increased the fear of dropping face after going out on a limb.

No profit without risk

Those that believe the financial industry has been getting too much risk may see this as eminently desirable. At the same time, however, it is vital to remember there is no profit without risk.

Overall, even when they are anonymous, people show a tendency to place too much emphasis on potential losses when evaluating dangerous prospects. Indeed, students playing the Deal or No Offer game in the laboratory additionally put undue emphasis on possible losses relative to potential increases. If we want to improve the quality of decision-making then we need to resist this tendency, not encourage it.

Make no mistake: transparency has its own merits. Above all, a degree associated with transparency is needed to prevent misconduct and potential fraud. The actual growing calls for ever-greater scrutiny tend to be wholly understandable, particularly at any given time when wider awareness of the investment world’s importance and intricacy is on the rise.

Ultimately, though, too much transparency may lead to an overly bureaucratic and unnecessarily timid financial sector. Overcautious choices that arise from excessive transparency will cost clients as well as shareholders money and harm the economy.

Nobody wants to eat on veal with a rat poison dressing so sufficient levels of transparency are needed. However, nobody wants bread and water every day either – and that is the risk if any kind of meaningful measure of freedom is denied.

Deal or No Offer shows how transparency causes us to be risk averse is republished along with permission from The Conversation