Racine Journal Times, WorkLife Section, June 17, 2007

À prendre ou à laisser

I’m not a big fan of game shows, but there is one I watch on occasion: “Deal or No Deal.”  The show has such wide appeal that it’s broadcast in 48 countries, with the French version, “Take or Leave It,” in the headline above.  Oprah recently got a taste of the show when she played a scaled-down version on her show.  What fascinates me about “Deal or No Deal” is the behavior of the contestants, which mimics the same game many play with real money in the financial markets.

During “Deal or No Deal,” a contestant is given the chance to win up to $1 million by choosing one out of twenty-six briefcases, which contains an unknown amount of anywhere between $0.01 and $1 million.  The contestant is required to eliminate briefcases from the remaining 25 in a succession of rounds, and each briefcase is opened to reveal its value.  After each round, Howie Mandel, the affable host, informs the contestant of the banker’s offer.  Howie then asks the infamous question, “Deal or No Deal?”  The contestant’s role is to decide whether to take the banker’s deal or keep playing.

The first thing I find fascinating about this show is that so many contestants believe they can affect the outcome of their random choices by making them, somehow, not random.  They pick numbers based on birthdays, anniversaries or sports jerseys.

Another interesting thing contestants do is, with hindsight, those prone to shoulda-woulda-coulda beat up on themselves for making the “wrong” choice.  According to Oprah, she was so upset about choosing the wrong case that she couldn’t think or talk about anything else for a week following her mini game.  She not only lost sleep obsessing about how she played the game, but in order to reach some closure, she had Howie on for a follow-up discussion on why she picked 8 instead of her favorite number of 11.

Economists and behavioral scientists like to study “Deal or No Deal” contestants because they offer a rare opportunity to help us understand behavior exhibited by folks making non-game-show financial decisions.  For example, many people overestimate their skill at picking stocks, especially when they have a bull-market tailwind at their back.  “Deal or No Deal” is like a Petri dish, offering us a glimpse into the minds of those who would be their own worst enemies.

By round four of “Deal or No Deal,” things get interesting.  I often watch in amazement when a confident Johnny Contestant passes up offer after offer even though the statistical odds of him winning more are against him.  If he goes too far and passes the point of no return, Johnny’s only hope for a pile of money is the amount in his briefcase, which never offered good odds.  It’s really sad when they finally open his briefcase to discover his winnings won’t even cover his cab fare to the airport.

Where did Johnny go wrong?  He miscalculated, round after round, the relationship between his upside potential and his downside risk.  Since the banker, for dramatic reasons, low-balls his offer in the first three to four rounds, it’s logical for Johnny to keep playing until the banker’s offer gets within a reasonable range of the actual value of Johnny’s briefcase.  But when the banker begins offering more than expected value, coupled with the fact that the increase of each successive offer is declining, Johnny is better off walking away.  That’s when he tempts fate (or the odds, to be precise) and goes for broke.

Some contestants in this situation do win big.  Like lottery winners, they wrongly influence many folks to throw their money at money-making or –winning schemes where the odds of success are against them.  Too often, they are completely unaware of their less-than-desirous situation.  Ignorance may be bliss for the winners, but not for the rest.

Do these game show contestants really mimic financial market participants?  Sometimes the resemblance is uncanny.  Consider the retired executive who let over $100 million of his wealth disappear in two short years.  By the time I was asked to provide a recommendation on his previous employer’s stock, which was after he rode an 87% decline, it was clear that this savvy businessman never pondered whether the bubblelicious tech sector could implode.  He never considered what would happen if the majority of his net worth got sucked into a black hole, never to be seen again.  He didn’t know that his happily ever after could vanish so quickly.

Now, he knows.

Like Johnny Contestant, a miscalculation between upside potential and downside risk was his mistake.  But there’s something even deeper that may explain the basis of mistakes such as these:  greed.  Human history clearly shows we’re prone to greed, which leads to poor financial decisions with limited (at best) or disastrous results.  Tulips, stocks, real estate, gold, silver, gambling and recently, Nigerian e-mail scams, are toys we have played with in our quest to get something for nothing.  Those who get their egos and emotions like greed out of the way learn to make sound financial decisions based on logic and reason.  Throw in some consistency, and you have great odds for a true happily ever after – no luck required.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.