More Lessons from Who Wants To Be a Millionaire

As host of the UK version Chris Tarrant would say, ''this is serious business''. A previous post of mine made a light-hearted comparison of the show to investing. Ha-ha, the joke is on me. I've just discovered a heavy duty study on the subject. Do you like equations with lots of Greek letters, then download Who Really Wants To Be a Millionaire: Estimates of Risk Aversion from Game Show Data, a paper published in 2005 by Roger Hartley, Gauthier Lanot and Ian Walker of Warwick University? Attached is a sample ... just don't ask me to explain.

The paper includes some fascinating trivia based on a complete inventory of the first 11 series of UK shows up to June 2003 (the authors had the cooperation of the show sponsors):

• 3 out of 515 contestants won the £1 million top prize (using my higher math skills, that works out to 0.6% not the 1-2% I from my first source), which is the same number who went away with nothing
• the mean of winnings was much higher at £54k than the £16k I'd guessed, though the standard deviation was a whopping £106k (i.e. those infrequent big prizes distort the stat)
• 2/3 of people voluntarily stopped by deciding not to answer versus the 1/3 who had to stop by getting a question wrong
• the quitters left with an average of £72k while the wrong guessers ended up with an average £17k (and this latter figure includes the £1 million winners who the authors decided had not quit voluntarily!); unfortunately the authors don't comment on this difference and I wish they had ... maybe it's called knowing when to quit while you're ahead?
• the probability that a phone-a-friend will know the answer is only about 40%
• the ask-the-audience lifeline is as valuable as both the phone-a-friend and the 50-50 put together; is this a manifestation of the wisdom of crowds / markets?
• 3/4 of the contestants were men, who the authors say are less risk averse than women
• the early round questions are more weighted with pop culture and sport
• the show's production team sorts the possible questions into 15 bins one for each of the questions levels, using their judgment and experience to make them progressively more difficult
• being more educated doesn't help much

Now I don't know if the authors truly would conclude this because it isn't said so in words (maybe the results of one of the equations says as much?), but a fascinating media report in the New Scientist magazine, titled Too Scared To Be a Millionaire?, says: ''The economists’ analysis, based around a mathematical model, suggest that more people would have won a million – and the contestants have taken home more overall – if they were less risk averse and willing to gamble.'' People are risk averse, and the authors find that again in regards to WWTBAM. I really wonder whether people are unjustifiably risk averse in general and with respect to investing as well. In other words, do people stick too much of their investments/savings into safe but low yield things like bank accounts and GICs? Isn't it curious for example that in the richest country on earth, the United States, people are at the upper end of the ladder in holding equities, as I noted in yesterday's post?