Application: Expected Utility Theory and Prospect Theory
Many people enjoy watching game shows. The premise of such shows is that for very little effort you might receive a huge pay-off. One of the most popular game shows in recent years is a show titled Deal or No Deal.
The game relies on players' decisions to take risks with the amount of money they may lose or gain. Two closely related theories help to explain taking risks in this game and in real-life situations; Expected Utility Theory and Prospect Theory. Your course text explores these theories in more detail.
To prepare for this assignment:
Play the game based on Deal or No Deal on the online site provided. Take notes as you play to track each of your moves, and write each decision you make, using a chart like the one below.
|
My Choice
|
What I Was Thinking
|
My Decision
|
The Outcome
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
Think about whether each decision you made conforms to Expected Utility Theory or Prospect Theory.
Think about changes in your decision making as you progressed through the game.
Consider your level of risk aversion and whether your experience with the game reflects how you make decisions under risky conditions on a day-to-day basis.
Focus on foundations of Expected Utility Theory and Prospect Theory.
The assignment (2-3 pages):
Duplicate the notes you wrote as you played the game, using a table like the one above. Submit the table with this Application assignment.
Explain each decision you made and whether it conformed to Expected Utility Theory or Prospect Theory. Explain why. Be specific.
Explain whether you think you behaved in a "risk averse" manner at any time. If so, explain when and why. Also, explain whether you think you are risk averse when making other day-to-day decisions and why or why not. Be specific.