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Why No One Ever Won Deal Or No Deal Revisited

Posted on the 21 December 2015 by Smallivy

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Without a doubt my most popular post of all time is:  “Why No One Will Every Win A Million Dollars on ‘Deal, or No Deal.'”  I get thirty or forty views of this post per day, although I’m not sure why.  Part of me wonders if some sort of scam is involved, but I can’t see how.  I guess there are just a lot of people searching for “Deal, or no Deal” and the post comes up high on the search engines for some reason.  One of the oddest things is that the post has been rated 2 1/2 stars, which is between poor and average.  I’m not sure why so many people are reading a post they don’t like.

In any case, some people seem to be missing the whole point of the post.  The important thing is not the rules for Deal, or No Deal, or whether someone actually won the $1 Million.  (Two people did win the $1 Million in 2008, but those were in games where there were five $1 Million prizes instead of just one, increasing the chances and changing the psychology of the game since there was a chance of having two or more million dollar cases remaining near the end.)  One person even commented that the show was off the air by the time I wrote the post, so of course no one would ever win.  This is not really important for the message I was trying to convey.

The way that the game was designed was ingenious because it would be extremely unlikely that anyone would ever actually win the million dollars. Even winning $500,000 was very unlikely. That is because it combined a very low chance of selecting the right case as “your case” with the psychological factor of people not wanting to give up something valuable, like a $250,000 offer from the banker, for the possibility of a something better, like a million dollar case, since the consequences of being wrong would be severe.  The reason is that they calculate how much they will lose if they don’t get the better thing and that weighs on them more psychologically than does the calculation of the increased benefit if they win.  The humiliation of being wrong in front of a lot of people then adds to the stress.

It would be a whole different show if people were just selecting cases randomly and getting whatever was in them.  By the odds, someone would win the million dollars within a couple of seasons.  Having the banker there, throwing out offers, is what makes it so unlikely for someone to win the $1 Million.  It would take both a person who was really lucky and selected the $1 M case at chances of 1/30, and who was willing to risk losing a lot of money for the chance to increase their winnings modestly.  Once the banker makes the offer, that money is in their pockets and they need to give it up if they want to continue.  How many people, given a sure $300,000, would decide to go for the million when they would only win $200 if they were wrong?

This same psychology comes into play in investing for retirement and helps explain why most people get nowhere near the final 401k account balances you can calculate they’ll get when they’re 20 years-old assuming a 10-15% return from stocks over their whole investing career.   Most people from moderate incomes don’t retire with $8 M even though those are the kinds of outcomes you see when you punch the numbers into an interest rate calculator.

The reason is that once they have $500,000 or so, they start to do things to preserve that money that are smart from a risk-reduction standpoint, like shift into bonds and cash, but which reduce their returns.  They may also do foolish things that go against all of the proven studies like pull out of the markets when they get worried that stocks are overpriced and then miss the big rallies.  If you’re not there for the big rallies in the stock market, your returns will go from 15% to 2% in a hurry.  Most of the money is made over short periods of time.

Because with compounding you make most of your money in the last few years, which is right when people tend to get skittish and shift out of stocks or start trying to time the markets, most people end up with far less than they should statistically.  For example, someone who is 50 years-old and has $500,000 in a 401k may start to worry about a market downturn and shift into cash or bonds.  This is a reasonable move since the stock market can fall by 50% or more at times, turning that half a million dollars into a quarter million dollars in the span of a month or less.  Left alone after a downturn, however, the account would regain its value within a year or two during all of the market crashes we’ve seen for the last thirty years and then continue to gain enough value to provide the 10-15% returns cited.  $500,000 will double three times between age 50 and age 70 at about an average 10% return, turning into $4 M.  If the investor at age 50 went half into bonds with a return of around 5-6% and continued to reduce her exposure until retiring at 70, the account might well be worth $1 M or less.

My point is that to give yourself a chance at making the high returns you really should, and get over the reasonable fear of a market downturn, is to save and invest more when you’re young so that you can put enough money aside for retirement in ways to preserve it to be safe, yet still have a lot invested in stocks to get the superior returns that come with equities.  You certainly don’t want to have everything riding on the stock market when you’re close to retirement since a market downturn can then result in a delay of retirement or, even worse, retirement in poverty should you lose your job or get ill and not be able to continue to work.  If you have $2 M in your 401k when you’re fifty-five years-old, however, you can diversify $1 M as you would if that were the only money you had and needed to preserve it (assuming that you needed about $1 M to cover your expenses in retirement), and then let the other $1 M be fully invested in stocks for the better returns.

In this case you might have $1.5 M in a diversified set of stocks (half of the $1 M you were preserving as if it were your only money plus the extra $1 M you had), with the other half million in bonds and cash investments.  If the market takes a 50% decline at age 56, you would still have $1.3 M or so.  You could then wait for the market to recover, which it most likely would and then some well before you reached 65.  You would have a good chance of seeing that $1.5 M in stocks double at least once before you reached 65, so you could retire with about $4 M, including your returns from bonds.

Once you were in retirement, you could continue the strategy with keeping as much of the account in wealth-preservation, modest growth mode as needed to cover your needs and leave the rest invested.  When the stock market did well, you could use a portion of returns from the stock portfolio to do extra things like travel or fund college accounts for grandchildren.  When there were market downturns, you could just adjust the wealth preservation portion as needed and leave the rest invested, waiting for the recovery.  With a little extra savings, you can take the banker’s offer and be able to go for the million dollar case too!

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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