Behavioural Finance: Deal or No Deal? Who Wants to Be a Millionaire?

In: Business and Management

Submitted By EMAC
Words 2000
Pages 8
Behavioural Finance - Erin McCall
Who Wants To Be A Millionaire? Deal Or No Deal?


1) The risk averse investor would accept the safety level of $500,000 because they would refuse to accept any risk. The risk neutral investor would have been indifferent had the expected payout for both options been equal however, given that the expected payout for the guess is higher than that of the sure thing the risk neutral investor would choose to guess. The risk lover investor would always choose the option pertaining to the most risk and therefor choose to guess.

2) The expected value of the guess is $15 million [(0.5 x 30M) + (0.5 x 0)]. However, the actual outcome will either be $30 million or $0.

3) The average person would choose the safe $10 million because their marginal utility after that point begins to decrease. $10 million is far higher than the average American’s income of roughly $51,000 , implying that most people would recognize that $10,000,000 is a life changing amount and not be willing to risk it for $30,000,000.
The individuals who choose not to risk the guaranteed $10,000,000 are most likely female , an older adult , married and in a low to moderate-income profession. Females are inherently more risk averse than men, making them more inclined to take the sure thing rather than risking it. Older adults must consider their sources of income after retirement as well as potential medical considerations when determining their propensity for risk, causing them to be increasingly risk averse. Furthermore, adults whom are married must consider how their actions affect others, leading them to be more risk averse, this magnifies when dependents such as children are considered. Their profession may play a role in their propensity for risk, however, it is the salary associated with the profession that plays a…...

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