In 1997, American behavioural economist Richard Thaler asked the readers of the Financial Times to submit a number between 0 and 100 so that the person whose number was the closest to 2/3 of the average of all numbers would be the winner. What will be your answer to this question as a rational decision-maker?
Your first step is to eliminate the obvious. The highest possible average from 0 to 100 is 100. It happens when everybody submits the number 100. It would mean the answer to the problem is (2/3) of 100 = 67. So, any number above 67 as a submission is not a rational choice.
You can’t stop there. Once you find that the rational choice for the highest number was 67, this number becomes the new highest average, and the (2/3) is 45! This iterative reasoning continues until you reach zero!
What could be an intuitive answer to this problem? Here, you assume people can randomly guess between 0 and 100, and the average is 50. (2/3) of 50 is 33. If you stop after stage 1, you submit 33 as the answer. If you continue for another round, based on the understanding that the average choice of the crowd is 33, the winner choice is 22. The number becomes 15 in the next stage and ends with 0.
So, the rational answer is 0. However, the average obtained in the actual experiment in Financial Times turned out to be 18; therefore, the winner was the one who submitted 12. The leading choices of the readers were 1, 22 and 33! When he repeated the game later, the average was 17.3, and the leaders were 1, 0 and 22.
Thaler Experiment: Financial Times
