Who would have thought that you could learn so much just by watching television? Maybe, my kids are right? … In their dreams!
A few nights ago I watched NBC’s Deal or No Deal, the Howie Mandel tour de force. It basically works by having people select one suitcase out of 26 offered then accepting or (usually) rejecting larger and larger offers by a mysterious ‘banker’ (just some guy in the control booth punching out a simple computer algorithm) as they eliminate suitcases.
If the contestant stays right to the end, they get keep whatever is in ‘their’ suitcase … a 1-in-26 chance of being $1,000,000, but, much more likely an amount from$0.01 to $500,000.
Ho hum …. usually …
But, the episode I was lucky enough to witness was a SPECIAL episode, because they put out TEN (10) suitcases containing $1,000,000 (with the other 13 suitcases having smaller amounts … the largest suitcase without $1,000,000 in it now held just $10,000. In other words it was a close to 1.3 : 1 chance of winning a million for the contestant, in theory.
Why was this so special … besides the obvious?
Well, it allowed two or three chances to really see
(a) How the ‘banker’ stiffs the contestants on the ‘offers’, and
(b) How the clueless contestants make their decisions.
Usually, it is very hard to work out the correct ‘odds’ when the ‘banker’ makes his offer and Howie sells a hill of beans to our hapless hero (i.e. the contestant) … just try this online version of the game to see what I mean …
But, last night, because there were so many $1,000,000 suitcases left at the end, there was (all approximately) one 1-in-4 chance offer, one 1-in-3 offer, and TWO 50/50 offers that even Blind Freddy could see.
Here were the odds and the ‘banker’ offers on each (now, these are approximate because I didn’t write them down and I didn’t record the show):
Offer 1: $170,000 for an (approx.) 25% chance of $1,000,000 being the chosen suitcase
Offer 2: $240,000 for an (approx.) 33% chance of $1,000,000 being the chosen suitcase
Offer 3: $330,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase
Offer 4: $380,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase
Would you have accepted any of these offers?
To me, and my maths is probably off, but 33 cents in the dollar on a 50/50 chance sounds a bit light … and, I would not have accepted ANY of these offers.
Anybody who regularly chases 50% chances with only a potential 33% payout will VERY QUICKLY go broke!
What did the contestant do??? She ….
…. rejected the offers [big anticlimax here].
But, I think that she should have accepted ANY ONE of these offers … in fact, I was shocked when she didn’t accept offer 3. or 4. on my table above!
Because, we haven’t considered her investment and return. You see, she invested NOTHING (except some time) in the ‘deal’ yet was offered hugely large amounts to simply pick up and go home …
… life changing amounts … possibly more money that she is likely to save in her entire lifetime …definitely, 2, 3, or even 4 times the Net Worth of the typical American family!
What does all of this mean?
If you are investing relatively small amounts of your portfolio on investments, gambling, game shows – basically anything where you are chasing a commensurate return – then pay close attention to the ‘odds’ (otherwise known as risk/reward).
But, if you are making the occasional BIG BETS – those all or nothing, bet the farm-type of gambles (such as changing careers, starting a business, etc.) – then you had better have a clear idea of how life changing the outcome will be.
… then, go for broke!