## KBC-5 and prospect theory

I just wrote a random post a while ago on economics of choices in KBC. Another random thought occured to me watching some recent KBC episodes.

Some background first…

There is another interesting addition to this year’s edition of KBC. In KBC-4 there was a new game within KBC called  Ghar Baithe Lakhpati Contest (Win 100,000 Indian Rupees sitting at home). In this Amitabh asked a question during the show and people had tro respond to the answer via the SMS. At the end of the episode he would announce the winner of the contest (based on who responded correctly fastest) and the winner would get Rs 1 lakh (Rs 100,000 ) just sitting at home.

Now in KBC5 it has been redone and is called Ghar Baitho Jeeto Jackpot Contest (win Jackpot sitting at home). In this Amitabh asks a question and people respond via SMS. The computer then picks a winner randomly from the correct choices. He is given Rs 1 lac immediately for answering the q correctly. And then also given a choice to answer an additional question. If he/she answers  correctly, he wins an additional Rs 2 lakh and if not he loses the whole amount. This is then called Winning the Jackpot or losing everything.

Now, the dilemma is whether people should go for the second q or not? The qs asked are mostly easy but still some may not be so sure…

It just struck me that this could be analysed using Prospect theory given by Kahneman and Tversky in 1979. It basically says two things:

• When people are making gains they play safe and choose things which involve least risk
• When people are making losses they want to wipe  the losses  and take more risk.
So unlike neoclassical model which says people are rational, here we have people making choices based on their prospects/situation. So we have this example:
For example, when given a choice between getting \$1000 with certainty or having a 50% chance of getting \$2500 they may well choose the certain \$1000 in preference to the uncertain chance of getting \$2500 even though the mathematical expectation of the uncertain option is \$1250. This is a perfectly reasonable attitude that is described as risk-aversion. But Kahneman and Tversky found that the same people when confronted with a certain loss of \$1000 versus a 50% chance of no loss or a \$2500 loss do often choose the risky alternative. This is called risk-seeking behavior.
Similarly we can apply these insights into Jackpot choice round of KBC 5. In KBC5 you are giving people assured Rs 1 lakh and a 50-50 probability of making Rs 3 lakh or Rs 0.
• Based on probability calculations: 0.50* 3 lac + 0.50* 0 = Rs 1.5 lac. Hence net gains are more than Rs 1 lac. Neoclassical model would say people should play as net gains are more . But that is not how people behave.
• Based on prospect theory, people still might prefer just Rs 1 lakh as they are not sure of the question at all.
On whatever I have seen so far, you find people doing both. Some are happy with Rs 1 lakh and others play the jackpot. Now we do not know whether people play thee jackpot as they understand the probability pay-offs (which is highly unlikely) or just for the fun sake knowing qs are very easy. Clearly some are more risk averse than even prospect theory would indicate…
It will be interesting if we could get full data on this with break-ups like age, location etc. This will then tell you how many are risk averse and others risk seekers. The age profile and location will add more light on the matter.
Anyways this was just a random thought. Just a way to show how you can use economics to make sense of (atleast try) day to day things…

### 4 Responses to “KBC-5 and prospect theory”

1. Ramesh Kumar Nanjundaiya Says:

KBC-5 and prospect theory
Very timely and interesting to note that Amol brought in this subject of KBC and has excellently applied the Prospect theory. Here is my story on KBS and its marketing impact – being a banker, I am more comfortable with numbers and bottom line, etc.
Quick discussion: The highest price money of the winner is Rs.5 crores (answer 13 questions correctly and take this and go). In the last 4 weeks the average winning money/participant has been say Rs.10 lacs/participant (actually not even that much). In India as well as from overseas, people are keen to enter this contest, watch it regularly, so they send SMS’s., even to answer the audience question, people send SMS’s, not once but many and they do this as quick as possible so that they get a chance.
My ballpark figure – SMS revenue /expenses: P & L
Average monthly expenses – show orgnisation, promotors, sponsors, related expenses, price money, etc, etc – Rs. 7 Crores/month.
Fixed expenses – say Rs. 2 Crores/month
Gross Monthly Expenses – Rs 9 Crores
Average monthly earnings from SMS’s – Rs 300 Crores (+/- 5%)
Net Profit – you guessed it right. Forget all those theories

2. sdsd Says:

kbc is a fixed show. 90% reserved dramabaaz. Auditions are to know how much drama u can create during the show to gain TRPs. During auditions everybody concentrate on their written test which is also a drama. If they do not find dramabaaz from the auditions they will call directly people from different parts of India. KBC can do charity by donating on CM relief fund and also can adopt child if needed instead of inviting them. So many people attend audition with a hope of fair selection. Once auditions are attended by any person they will definitely realize how much dramabaaz and very serious they are (KBC people). They only open phone lines to earn more money to donate from the number of SMS they received from crores people. So people hoping to take part in KBC can only dream of that if u have created a interesting story of economical distress/ poor health facility/ poor communication system/ atyachar in family, etc. better invite online application for more stories next time.

3. vivek kumar Says:

i want participate in kbc please give me in formation

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