Investments 

Being in the limelight inhibits risk-taking

This article is part of
Summer Investment Monitor - June 2015

Overall, even when they are anonymous, people show a tendency to place too much importance on potential losses when evaluating risky prospects.

Indeed, subjects playing the Deal or No Deal game in the laboratory also place too much importance on potential losses relative to potential gains. In order to improve the quality of decision-making, this tendency should be resisted rather than encouraged.

Calls for more transparency remain entirely understandable, not least at a time when wider awareness of the industry’s complexity and importance is growing – but the economy does not benefit from an overly bureaucratic and timid financial sector.

Too much transparency may lead to overcautious decisions being made by financial professionals, which in the long run will cost clients and shareholders money.

Dr Dennie van Dolder is a research fellow at the Nottingham School of Economics’ Centre for Decision Research and Experimental Economics (CeDEx). He is also an affiliate of the Network for Integrated Behavioural Sciences (Nibs). The study referenced here is ‘Risky Choice in the Limelight’, co-authored with Martijn van den Assem of VU University Amsterdam and Guido Baltussen of Erasmus University Rotterdam

DEAL OR NO DEAL: AN EXPERIMENT

The experiment followed a similar format to the TV show where:

In each of a maximum of nine game rounds, subjects choose a given number of cases to be opened. After the prizes in the chosen cases are revealed, an imaginary banker offers to buy the subjects’ own cases. If the subjects accept the offer (‘deal’), they receive the amount offered and the game ends. If the subjects reject the offer (‘no deal’), play continues and they enter the next round. If the subjects decide ‘no deal’ in the ninth round, they receive the prize in their own cases.

The experiment was conducted in two settings:

Subjects either played the game in a standard economic laboratory or in a limelight environment, where subjects played the game in a setting mimicking a TV studio with a live audience.