The TV Game show, “Lets Make A Deal” can give us some great insight to human behavior. Especially with investments.
When the market is moving, especially when moving up, many become susceptible to the fear of missing out. Essentially, the feeling something (good) is happening but we are not participating.
To further define: not that you’re missing out, it’s the FEAR you MIGHT be missing out.
But what happens when the market is moving down?
Is it better to opt for the known? Or is it better to go with the risk, the unknown?
In general, humans tend to fear losses, more than savor an opportunity to make money. The concept of regretting losses or making bad decisions often holds folks back from opportunities.
Noted psychologist and economist Daniel Kahneman, known for his work on behavioral economics, explains something similar with his endowment theory. In a nutshell, humans tend to weigh losses more substantially than potential gains.
We see great examples of this on the TV show Let’s Make A Deal.
In the book, “The Self-Illusion: How the Social Brain Creates Identity” author Bruce Hood describes how “even when the object is not actually in one’s physical possession, such as when bidding for an item in an auction, the prospect of eventually owning something produces a bias to value it more.
People who bid for the same items in an auction but had been allowed to handle the items for 30 seconds, compared to those bidders who only examined the object for 10 seconds, were willing to bid 50% more for the same objects.
Watch an episode of “Let’s Make a Deal” to see this in action. Host Monty Hall would let the folks hold a gift, or hold the cash he hands them.
On many episodes, more folks on the TV Game show eventually opted for cash in hand versus taking “what’s behind the curtain where Carol Merrill is standing.”
But how do we bring this all back to our investments?
What is the purpose of the money in discussion? Will the funds be needed in the next year (or next two years)? If so, that money should not be at risk in the stock market.
What if the funds in discussion are for a longer term? For example, what if the money is for a future purpose like a college education or retirement? Should we invest in something hopefully keeping pace with inflation and provide an opportunity for growth?
Knowing the purpose behind specific investment dollars is an important step in determining how it needs to be put to work. Whether that is money for investment – or the cash Monty Hall is offering you on Lets Make A Deal.
To see examples of how hard it is for people to make decisions, especially about money and values, check out this piece (link below) from Let’s Make a Deal in 1973. It’s interesting seeing the agony some endure over decisions.
But it is equally charming to see prizes from “Dicker and Dicker of Beverly Hills,” as well as Teledyne’s Packard Bell 25″ color television (with the built in stereo, tuner and 8-track player), and mentions of the “energy crisis.”