Risk aversion

Happened to watch an episode of 5th Grader yesterday on GSN. The contestant, a professional poker player of all people, carefully worked his way up to five hundred grand.

The show then gave him the usual option of trying for a million bucks on one more question, or leaving with the half-mill. Missing the question would cost the contestant all but twenty-five grand.

Unlike some of the other money tree shows, 5th Grader at least reveals the subject of the Big Honking Final Question. This time it was "U.S. History," which the poker player said was his favorite subject in school.

But he didn't have the courage to test his favorite, and quit the game with the half-million bucks. Sure enough, when the question itself was revealed, he knew instantly that Alexander Hamilton was the first Secretary of the Treasury.

Utility theory had nailed him. That's fancy talk for a half-mill bird in the hand is worth (in this case literally) two half-mills in the bush.

My business (insurance) is dependent on utility theory to keep folks paying premiums because a major uninsured loss would be too much to bear. And utility theory also keeps contestants from risking money to make more money, even when the odds are favorable...much to the relief of game show accountants.