You are at some juncture in a television show where you have been given a choice - take $500K right now, or face a situation in which you either win $1 million or you lose it all (well, you get to keep $25,000 but that’s almost like losing it all).
What would you choose?
Personally, this is a no-brainer for me; take the $500K and be happy.
However, the dude (Steve) on episode #113 of Are You Smarter Than a 5th Grader, took the 50% chance and lost it all (I am basing this 50 % chance on a two-outcomes basis - either you win it or you lose it. The mathematically true probability of winning the money, is a bit complicated affair to calculate and would be far far less than this). I thought it was a small lesson in “risk perception” there. Perhaps, Steve didn’t have the patience to think it through at the time (public performance pressure and the smell of free money can make people do weird things) - but I am sure he won’t try to make such a bet ever again.
This sort of goes in tune with my post earlier this week about how you would treat a windfall, in which I mentioned a potential tendency to take extra risk (more than reasonable risk) and show excessive optimism, when it comes to free money.
You have managed to accumulate $500,000 in savings. Now, a shrewd friend gives you an honest and genuine investment option - invest it in this so-and-so venture and this will either double your money or you will will get back just $25,000. Would you do it?
Personally, I don’t think many people (in their normal surroundings) will take that risk. Steve’s case was no different - he already had the possession of his $500,000; the money was his to keep and he should have treated it like his hard-earned money - but a combination of factors (most probably the feeling of “free money” and the excessive optimism), made him put his money at risk.
Have you noticed that, in most TV shows, such make-or-break options (options with the highest risk) are usually offered near the penultimate step - around which the participants are at the peak of their optimistic self and most likely to lose it all.
Come to think of it, even the gambling industry probably works a lot on this concept. Perhaps (I don’t have any concrete proof here), the worst gambling losses may be occurring when a gambler wins money right at the onset of whatever game he/she is playing. Early wins may be altering the risk perception of a gambler by making him/her overly optimistic on future chances and encourages more gambling. Have you experienced something similar in a casino anytime?
Greed complicates the matters even more.
(Disclaimer: I don’t really *watch* the TV show mentioned above, but sometimes it’s more entertaining than flipping channels )