Deal or No Deal – Take $198,000 or Go for $2 Million?


in Investment

Though I don’t spend much time watching TV game shows, Deal or No Deal is one that I pay attention to when it’s on. Watching people make big financial decisions under pressure and in a short time frame is an interesting study in human psychology that’s way bigger than game shows themselves. They all involve similar formats, but on this show the numbers are, well, bigger—which adds to the drama.

On an episode last week a lady was offered a $198,000 deal from the banker if she quit the game at that moment. Even with her husband cheering her on to take the deal, she confidently declared “NO DEAL!”, clapping her hands and smiling merrily as she did.

Now, this is a scenario I’ve seen again and again on this show: a substantial amount of money—often in six figures–is offered to the participant to exit the game. Almost invariably, the participant refuses the deal and opts instead to go for the all the marbles–$2 million.

It often makes me believe that participants are prescreened on this question, and if they indicate any course other than playing the game all the way through to the grand prize they’re disqualified (it’s just a theory based on observation; I have no evidence to support this claim).

Little pigs become fat pigs and—you know what happens to fat pigs

I don’t know about anyone else, but as attractive as $2 million might be, a six figure prize could plug a lot of holes in my financial life, and that’s the route I’d take without much thought.

Now I know that a lot of people faced with the choice of the banker deal versus the grand prize go for the $2 million under the reasoning that “I came in here with nothing so I have nothing to lose—I’m going for the $2 million!” On that point I’m not speculating; I’ve heard many of them say that in exchanges with family members on the side.

As much as I might want to respect that thinking, what happens to the vast majority of the people on the show that opt to go all the way is that they leave the show with far less than the sweet deal the banker offered them when they were at a more opportune position in the game. The lady on the show last week ended up walking away with $60,000, which is actually much better than most participants do. Most come away with only a few thousand dollars after refusing the bankers best deal.

Here’s my thinking on having nothing to lose…True, when you came in, you had nothing to lose; but the banker just offered you $198,000 (or what ever the figure is) and now the dynamics of the situation have changed. Now you do have something to lose–$198,000.

That’s obvious to me sitting at home, so I have to wonder if so many of these people are possessed when they’re on the show and on a roll.

Bringing it home to everyday life

No, I’m not here on a personal finance blog writing about a favorite game show. But I actually think there are lessons from this simple game show that carry over to the real world and perhaps affect our own financial decisions.

When we’re “on a roll”, do we have a tendency to believe that we’re somehow unstoppable? Or that our thinking is incorruptible? Or maybe that we have a “once in a lifetime opportunity” that we want to play to the hilt? Or even that karma has taken over and will guide us to bigger and better things?

Curiously, it’s often when everything looks good, when it looks as if the stars are aligned in our favor that we’re most vulnerable to making poor decisions.

Where can this happen in real life?

The Stock Market. After a run up of greater than 50% from March of 2009 through the spring of 2010, the Dow Jones Industrial Average has given up more than a thousand points.

If you were in the ride up, did you sell near the top? After all, a run of greater than 50% in the space of a single year is quite spectacular—cashing in on those gains would seem to be almost instinctive. How about the market runs of the 1990s, and then during the rally that followed the post dot-com crash that brought the market up to the 14,000 level—how many people cashed out near the top of those runs? Do we believe that rising markets can rise forever? Would we be better served by taking our gains, then sitting on the sidelines until the next market slide, or do we even have the discipline to do so?

The same applies to individual stocks. How many times have you held onto a stock, watching it double, triple, quadruple in price—then watch helplessly as it comes back down to earth?

Selling your home. It’s often said that the first offer you get on your home will usually be the best. But people routinely refuse early offers, only to accept less generous ones a few months down the road.

No one is more confident than a person who has just listed his house for sale, and the memory of bidding wars for properties just a few years ago still sit pleasantly in the recesses of many people’s minds. But reality usually goes in a different direction, as offers tend to get lower as the months pass. Selling prices usually don’t get better with age!

Mortgage rates. In my tenure in the mortgage business, I got to experience “rate greed” first hand. That’s a phenomenon that occurs when rates hit record lows, but people decide to wait to refinance with the expectation of still lower rates.

That may sound absurd on the face of it, after all if rates are at record lows how much better can they get? Yet people would say (with rates at 4.75%) I read on the web the other day that rates are going down to 4.00% so I think we’ll wait. Or, let’s lock WHEN rates hit 4.50%? Do they know something the rest of the financial world doesn’t?

They have something good right in front of them, but they want to keep playing the game waiting for something even better! Here’s the reality of the rate universe: rates that tend to drop ever so slowly will rise in a matter of days or weeks, and rise dramatically at that. Once that happens, today’s rates will be gone and there will be no turning back.

Is the bird in the bush so attractive that we’ll ignore the one that’s sitting right in our hand?

Have you ever been way up on an investment or in a transaction, but greed took over and you ended up walking away with something less—maybe a lot less—than what you could have had? Why do we believe that a good deal will get even better?

Kevin At Out of Your RutThis post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog

(Photo courtesy of \!/_PeacePlusOne’s )

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