Thinking inside the box – What ‘Deal or no Deal’ has to tell us about investor psychology


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

If it did not smack of hubris – of the kind of pride that precedes a crashing, albeit potentially character-building, fall – we might challenge visitors to this site to contribute unpromising topics on which we would seek to offer some sort of, well, value perspective. For now, however, we will content ourselves with a discussion of the value lessons on offer from ‘Deal or no Deal’.

For one thing, doing so is surprisingly topical – for anyone who might have missed the news, Channel Four has just confirmed it is calling time on the studio-bound UK version of the gameshow, which has run since 2005. In what longstanding presenter Noel Edmonds has described as “the beginning of an exciting new era”, however, a number of episodes are still to be filmed on tour around the country.

And for another thing, finding a value angle is surprisingly easy as Deal or no Deal has actually been the subject of an academic paper, Decision-making under risk in a large-payoff gameshow. Better still, among the paper’s co-authors was behavioural economist Richard Thaler, whom we have met before on The Value Perspective in articles such as Portfolio theory and Less is more.

It turns out Deal or no Deal holds a particular appeal for behavioural scientists as it affords the chance to examine the decision-making process under some interesting conditions. Most obviously, it is played for high stakes – a top prize of $1m (£757,000) in the US, for example, and more than four times that in the Netherlands, where the show originated. In the UK, it is a not insignificant £250,000.

It is also relatively straightforward to figure out the theoretical average of all the different cash prizes contained in all the remaining boxes at any point in time … and, as we type those words, we are struck by the possibility that not every visitor to The Value Perspective will be an aficionado of the show and a quick run-through of the rules might therefore be in order.

Different cash prizes

In the UK, the game revolves around the opening of a set of numbered boxes, each of which contains a different cash prize. The values of all the boxes are known at the start but the specific location of any prize is not. The game begins with a contestant picking one of the boxes as their own although its value is not revealed until the end.

The contestant then chooses boxes to be removed from play. The amount inside each chosen box is immediately revealed, allowing the contestant to eliminate it from the possible prizes that could be in the box they picked. At certain points in the game, an unseen ‘Banker’ offers the contestant an amount of money to quit the game.

Based roughly on the amounts of money remaining in play and the contestant’s demeanour, these Banker offers are typically attempts to ‘buy’ the contestant’s box for less than it contains. Each time, the contestant decides whether the Banker has a deal – or no deal – and the game continues until the contestant either only has their own box left or they finally succumb to an offer.

In theory, then, whenever the Banker makes an offer, you know exactly what you should win from all the boxes still left in the game. It therefore follows – again in theory – that if you know your expected return, you should be able to make a rational judgement on the offer being made by the Banker. But if that were also the case in practice, behavioural scientists would not be writing papers on the game …

Thaler and his colleagues analysed a large number of contestants playing versions of Deal or no Deal in Germany, the Netherlands and the US and categorised the vast majority as moderately risk-averse – that is to say, they tend to accept offers from the Banker that are around 25% below the theoretical expected return left in the boxes overall.

Two higher-risk scenarios

The authors found, however, that this analysis goes out the window in two types of situation – when the contestants have had a terrible start and have eliminated lots of the ‘big money’ boxes and when they have had a really good start and have eliminated lots of the small numbers. In both scenarios, players were found to be happier taking far greater risks than rationality would suggest they should.

Such a conclusion ties in with two well-established behavioural finance traits, the first of which is known as the ‘break-even effect’. This is when a player – or an investor – finds themselves so far in the red they end up thinking, what the heck, I may as well just roll the dice (sometimes figuratively, sometimes literally) and take a few big risks to try and get back to something approaching break-even.

The second – and almost converse – trait is the ‘house money effect’. This time the player or investor finds themselves well ahead of the game and so they become more willing to take on more risk. The implication here is that they are not yet thinking of the money they have made as their own – and, if it is somebody else’s money, then perhaps they are a bit more willing to risk it.

In these two very specific scenarios, people tend to be more willing to take on more risk than theory suggests they should – and this happens whether the ‘game’ is Deal or no Deal or stockmarket investing. For it is precisely when emotions are at their most extreme – when they have suffered a big loss or enjoyed a big gain – that investors tend to make their most irrational decisions.

Or as Thaler and his colleagues put it in their paper: “‘Losers’ and ‘winners’ generally have a weaker propensity to ‘Deal’ than their ‘neutral’ counterparts.” It goes without saying that, here on The Value Perspective, we use a value investing framework as a way to maintain our own ‘neutrality’ – striving to remove emotion from the equation and instead to focus on a dispassionate appraisal of numbers.

Who knows? Perhaps it could also help diehard British Deal or no Deal fans to cope when the Banker makes his final offer …


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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