Would You Settle for 500K or Go for a Million Dollars?
April 10, 2007
Deal, or No Deal! That’s the million dollar question that contestants must answer on the TV game show hosted by Howie Mandel. How you play along with this game might be a good indication of how you view the risks and rewards of investing.
Financial Risk Tolerance
If you’ve ever done any type of financial planning you’ve probably filled out a questionnaire about how much risk you can tolerate. These types of questions are difficult for me to answer because they’re so general, so impersonal, and the questions often seem out of context with life situations. Deal or No Deal on the other hand breaks it down to a basic decision where your answer might tell you a little about your risk style.
The Rules
The contestants on the game show are faced with a set of cases, each containing a dollar amount they can win, ranging from $1 up to $1 million. They randomly open the cases one at a time, once they’ve opened a case the contestant cannot win the amount of money the case holds.
Behavioral Finance
As the game goes on, the number of cases shrinks and how much they can still win depends on which dollar amounts they have not opened. At several intervals the contestants are offered a certain sum of money to walk away from the contest. For example, late in one game there were four cases unopened. The dollar amounts in the cases were $1,000, $5,000, $20K, and $100K. The lady was offered $24,000 to walk away. What would you do in that situation?
In another scenario the four cases held $75, $750, $500K and $750K. The offer to walk away was $291K. Would you hold out for the chance to win $750K or would you settle for $291K. What captivates you, the potential of winning threes quarters of a million dollars or the fear of losing one quarter of a million? What would you do with that money if you won? How would it change your life? Are you willing to risk a lot of money to make a lot of money?
Find Your Sweet Spot
Obviously this is just an initial screen, to determine what types of investments suit you best would require research and planning on your own or with a professional. However, it does help you understand how you react to the financial pressures of risk and how much you’re willing to lose in return for the potential of a big reward.
All posts by Ben Edwards
A bird in the hand… you know how the rest of it goes. If caught up in the moment, I might go for the million too.
KMull, you’re right it is all about the odds. Unfortunately most contestants on the show are at a disadvantage, they can’t do the math in their heads and they have hundreds of people screaming “No Deal” at them.
Luckily for us investors, we get to make decisions in the peace and quiet of our own homes with a spreadsheet in front of us 🙂
It is actually pretty mathematical. Expected return:
((Probability of outcome 1) x (Reward of outcome 1) + ((prb of 2) x (reward of 2)) + …
The game is all about timing. The first two rounds don’t really matter, unless you knock out every single large number (over 100,000). As long as you have two or three left, then it is just timing.
If $500,000 and 1 million are the only two left, the offer will be around $750,000. The banker tries to undersell you a bit, so probably around $738,000 or so. It’s a coin flip. I take the offer. I’d rather have an additional ~250k than lose it trying to double it to a million.
I’d take the $500k of course, on the basis that if someone had walked up to me that morning and offered me a cheque for that amount, I’d say yes. But from what I’ve seen of it, the show at this point seems to select only colourful and wacky people, with similarly hysterical family (which makes it almost unwatchable to me) – the boring ordinary guy who’ll walk with $50k doesn’t appear on it any more.
I tend to be more conservative myself. I’d probably have taken the 291K and used it for a mix of business ventures, stock market investments, and charity donations.
If $500K or $1 Mil were the only choices, I’d take the $500K because it’s a sure thing, and I could easily grow it to $1 Mil in a relatively short time period.
-limeade
Definitely take the $500K. For the same reason as Thomas: because you came with nothing!
I think it would depend on the situation, but I would likely take the high risk of going through with one more selection, as you came to show with nothing.