$5 Million Guaranteed Or 20% Chance At $100 Million - What Would You Choose?

I am curious what the risk level is of people in the security industry is.

As such, I am throwing out this poll. You are given a choice, either $5 million guaranteed, cash in hand, or a 20% chance to get $100 million today. What do you choose?

Vote below:

I'll give my answer in the comments below.

Summary:

Security professionals are significantly risk averse overalls, shows the poll results. Nearly 90% of 100+ respondents choose the $5 million option, even though the expected value of the other option was 4 times greater (i.e., a 20% chance at $100 million is an expected value of $20 million).

This is neither right or wrong but does highlight the risk tolerance of our industry.


My choice is $5 million because the impact of $5 million vs $100 million is not that much and the downside (80%) of getting nothing is far greater than the incremental $95 million, even though the expected value of the 20% of $100 million is $20 million.

Now maybe when / if I am older and wealthier, I'd choose differently.

going for the sure thing... give me the 5 million...

John,

How are you measuring risk in this poll? Is the risk not going for $100 million and taking the $5 million? Or is the risk not taking the $5 million and going for the $100 million?

The risk of "20% chance to get $100 million today" is the 80% change you get 0.

So in the first case, it's $5 million period; in the second case, it's $100 million if you 'win' (20% chance) and $0 if you 'lose' (80% chance).

For sure, the 20% chance for the $100 million!

About 15 years ago, literally days before the dot-com crash, every star possible aligned in the heavens, allowing me to sell my share of my first business for something north of $50 million. Today the same business would be worth 1/10 of that. So, I was incredibly fortunate.

Ironically my reasons for taking the risk are the same as John's in reverse.

The impact of $5 million is minimal. It wouldn't change my life, at least day to day.

The impact of $100 million could be big. I might buy a small island w/ plane, if the price was right.

"The impact of $100 million could be big. I might buy a small island w/ plane, if the price was right."

From which you would continue to comment on IPVM.... ;)

With that kind of money I'd probably just hire people to post for me. ;)

in that case where should i send a resume?

btw, a new island just surfaced on the market:

It's a bit of a fixer-upper as islands go, but it does come with central heating (volcanic) and genuine igneous subflooring. Act now, this one won't last long...

My answer changes depending if I'm starting with $0 or millions in the bank already.

You don't know how much money you have in the bank? :)

I dont always know after the wife has been gone for hours with the debit card.

At least Debit cards are usually limited daily to $10,000 spending limits.

also: more money, more problems

I rather lock 5 million, than take a 1 in 5 chance to make 100, which is 100% not guaranteed!

10 years ago - chance to get 100M. Now with a family and kids - 5M.

Since the expected value is the same, I would expect a risk premium would be necessary to entice some to hazard the 80% failure rate for the $100M possibility.

The expected value is not the same.

  • The expected value of $5 million guaranteed is $5 million
  • The expected value of a 20% shot of $100 million is $20 million, ergo 4x the expected value.

This is one of those times I wish I could quietly delete a previous message LOL

$5M without a doubt.

Then I would gamble - I mean invest - a portion of that in the stock market to try to make a bigger win. Or start a company with the same goal to make more.

i.e. there is still nice upside potential for the $5M.

Another risk revealing question would be at to ask:

How low does the guaranteed payout amount have to get to before you would take the chance to win $100 million instead?

$100,000 or $10,000? or $1,000? Ouch!

Agreed.

For example, if the question was "Would you take $5 guaranteed or a 20% chance at $100?" you'd have to think the results would be lopsided to the latter.

But this does show how the practical impact of wealth impacts a theoretically un-rationale move (favoring a far lower expected value to lower risk).

At my age i'll take the 5 million and use it as a grubstake, thus doubling it every 5 years or so — the wiser move. and who know maybe I would end up on an island too <GRAN>

Rick

I'll bet that if you paint the risk equation with a somewhat different picture and tweak the odds slightly, it can make a huge difference on one's 'appetite for financial risk'. What if it was only one million against a shot at fifty, and a one in six chance instead of one in five?

A guaranteed, tax-free, suitcase full of 10,000 crisp new Benjamins, free and clear.
Or...
A single roll of a single die at a Las Vegas Craps table for a shot at 50 times that amount.

Instant cash-in-hand "Millionaire", or a one-in-six shot at enough money to buy a yacht, a mansion, a small plane and five awesome cars... with enough left over to still have difficulty spending through the interest alone each year.

Does that change people's risk tolerance?

" A bird in the hand"

John, I have to assume there's some context within which this decision exists. If it's (say) business, then I have to assume that this will not be my last chance at a choice. That is, in a year I may be faced with the choice of $1 million or a 10% chance at 5 million, etc.

We actually do make decisions like this in this industry. Do I have my sales people slog through 100 calls today knowing they'll close a bunch of small deals or have them spend the next week working up a proposal to land a huge sale? Do I have my engineers work on the also-have feature I know people expect, or the innovative new thing that will differentiate us?

Business is about risk and placing bets. A 20% chance at a huge return is a good bet.

I intended this to be you personally, Steve Mitchell, regular people, not Steve Mitchell, corporate titan :)

That is a good distinction. Also, it depends on the size of one's business. Does a startup take the route of the low risk $5 million or do they gamble on high risk / high outcome paths (that more than likely will bankrupt them)?

As a smart individual, then yes, the $5 million. :)

But in the 'security industry' business is a mix of some sure things and some long-shots. The trick is to create the mix, make it a balanced mix, and fund some high risk gables along with short term gimmes.

Is the security industry characterized by this type of risk? Maybe not, given the lack of innovation in our industry as a whole..

Does a startup take the route of the low risk $5 million or do they gamble on high risk / high outcome paths (that more than likely will bankrupt them)?

Depends on what you consider a startup. In the classic technology startup sense, it's often a company operating off of investor money, at a loss, with promises of big payoffs down the road (relatively high risk). Contrast this to a mom-pop business that wants to make payroll and doesn't have good financial backing (low risk).

The established corporate company is almost always low risk. Even when their CEO is arguing they should leapfrog the competition yada-yada, the many layers of management between them and the bottom line are instead motivated by this quarter's numbers, and are penalized when risks do not pay off.

Even with tech companies, especially now with the low cost of getting started, there is an tension between entrepreneurs and VCs.

VCs want to swing for the fences on every deal and, since they have diversification of many different startups, they can stand the losses (e.g., losing 4 out of 5 times on the $100 m bet) but entrepreneurs do not have that luxury (if they have lose once, that's $0 for them and a years of wasted hard work).

I believe you should have my address on file John. I will take the $5M payout please.

Jon, sorry, I think you meant to address that to undisclosed A.....

I voted the 20% chance at 100 million, but I'm 28 and have plenty of time to save for retirement. The risk of striking it really big is worth the reward if it happens.

I also like to think I have some cojones.

Yeah, you have a lifetime to regret not taking a $5M sure thing!

The risk of striking it really big is worth the reward if it happens.

You mean the risk of striking out, I think?

I also like to think I have some cojones.

I would try my luck at a 20% chance at $100 million. Life is worth living when the stakes are raised and you let fate deceide your destiny. We're all working for a better tomorrow, but why not take a 20% chance at a great future?

Hell, I'm due for a few million once a few of those Nigerian princes finally send me my cut ;)...

...you don't think $5 million is a great future?

I never said it wouldn't be a great future, but I have this nagging feeling a few years down the road I would look back and think of what could have been.

I wouldn't feel as bad for a superfluous lifestyle if I know I took a chance and it worked, rather than something that was hand-fed to me and I simply said "yea, that's good enough". With a guaranteed $5 million I feel like I would have simply settled, and for some people, that's fine, but a long shot has a chance to hit the mark when the wind isn't blowing, and that's the kind of shots I want to take.

I will bet you love Vegas.

I don't know if we should send Derek to ISC West this year....

You can't loose money you never had.

This is an interesting topic, and given the poll, almost 20% of the poll takers would take the chance at $100 million. This really echos out to what we see in society, where a lot of people take the safe, normal route (which, again, is totally fine!), and there are only a few bold risk takers that, most of the time, crash and burn, but win it big when it works.

Fellow risk takers of IPVM, I salute you!

Lets pose the question a different way. Say you could invest in a business that had a guaranteed return of 5 million, or you could invest in a business that could possibly return 100 Million. Your investment was 100K.

I think given a 20% chance, I'm still walking away with the guaranteed $5M. $5M is a guaranteed life change. $100M is a 20% chance at a more drastic life change. I can see increasing returns on $5M and grow that sum far more easily than I can turn my current assets into $5M. I'm not saying I'll turn $5M into 100, but it could definitely turn into double digits.

I think the other interesting framing of this is what if both outcomes are negative? What if the question is a guaranteed loss of $5M or a 20% chance of a $100M loss? Obviously the only person here this realistically applies to is Undisclosed A up there, aka Rich Uncle Pennybags.

...a guaranteed loss of $5M or a 20% chance of a $100M loss?

And about a year ago, when faced with a similar situation, I cried Uncle, and sold all my AVO.

John, if anyone else had asked this question I would have thought it was an idle musing, just spun out for entertainment's sake.

But knowing your undeniably pragmatic nature, I can't help but wonder if it's not more than that...

So, is there another tender offer 'on the table' today, one that you're considering, perhaps? ;)

Yes, BRS Labs, $100 million in BRS Labs stock for 100% of IPVM, should I take it?

Yes, because then you would own 100% of both. ;)

Update: And I can't believe I have to explain this, but BRS Labs did not offer to buy IPVM. Evidently, my (obvious?) joke has transformed into a rumor amongst the BRS Labs 'community'.

Take the $5 Mil - more than enough money for me and dad always stressed to me a bird in the hand is worth 2 in the bush.

Since, 5.5 Mil is my NUMBER.

I'd take the guareeteed 5 Mil, invest it (not nessessarily stocks), and live comfortable off the monthly returns for the rest of my life, while I pursue other interests!

Easier said than done, though.

You have $5,000,000 cash in hand.

Taxman cometh. -$2,000,000

You now have $3,000,000 cash in Money Market / CD's?

CD's / MM paying 1.5% = approx $50,000 / year

Taxman Cometh Again. -$10,000

You now have $40,000 / for the year

Inflation Adjusted principal after 1 year $2,997,000

How much do you need to live on?

Absolute worst case scenario:

$100,000 per year for 30 years and that's after taxes. Most people can live pretty decently on that.

And that's worse case.

Most people can live pretty decently on that.

Yes but,

Most people can live longer than that.

Who wants to fear living because they won $5,000,000? Or hope the pace of medical science slows down a bit? I would take the $30,000/unlimited over the $100,000/30 yr plan in a "heartbeat". Now true, the $1,000,000/5 yr, live to excess, f the taxes plan has some appeal also.

In any event, Thomas specifically indicated low-risk investment and interest subsistence.

$5M is not enough?

Meanwhile, the entire 2nd, 3rd, and developing world thinks they've taken crazy pills all of a sudden.

Interesting downsides to big jackpots:

[From the linked reddit comment]

Large jackpot winners face double digit multiples of probability versus the general population to be the victim of:

  1. Homicide (something like 20x more likely)

  2. Drug overdose

  3. Bankruptcy (how's that for irony?)

  4. Kidnapping

And triple digit multiples of probability versus the general population rate to be:

  1. Convicted of drunk driving

  2. The victim of Homicide (at the hands of a family member) 120x more likely in this case, ain't love grand?

  3. A defendant in a civil lawsuit

  4. A defendant in felony criminal proceedings

http://www.reddit.com/r/AskReddit/comments/24vzgl/you_just_won_a_656_million_dollar_lottery_what_do/chba4bf

Come to an agreement with the other 4 people for 10 million each. everybody wins.

I just asked a millionare friend his take and he said the 20% shot at $100M for sure. I only asked him because I want to see his choice vs mine for perspective sake. He said if he could even have a 10% chance at the $100M, he would take that. He said $5M doesn't change his life, but the $100M would. He said it takes 7.5 years to double your money today, so spending $5M for a quick shot at $100M would save him 150 years of investment time.

1:150 time

1:20 chance

Your friends with undisclosed A? ;)

Thanks for sharing. It makes perfect sense. If you already have lots of cash in the bank, much more sensible to go for the 1 in 5 chance at $100 million.

If A disclosed I could tell you, but I doubt it's him. Lol

with those feeling like they couldn't live on 5 million dollars do you think you would stop working if you had won or been given the money? personally I would have to keep working in order to stay sane... not sure if anybody else would do the same or just retire...

I would be able to live just fine off of the $100,000 / year that John estimates, but I would still keep working. The fall back of knowing I don't HAVE to work would be relieving though.

No, I don't know you Jon, but I feel like I do. :)

btw, John's 100K 'estimate' is just the three million (after taxes) equally divided over thirty years. Like he says its worst case, since hopefully some reasonably safe and insured investments will reappear, ones that yield over 3% after inflation. So, depending on your age and health it's a way to go...

But you don't strike me as someone who would try to just fritter away your days, even if you could! You feel strongly about many things, (much stronger than I), and conviction like yours is worth a lot, more than $100K a year, for sure.

You believe and therefore others will believe you. So I'm guessing you would end up taking the money out of the safe zone and putting it in 'play' in creating some type of organization. Even though it's risky it's not the same as Vegas, and your skill and acumen would determine your result more than the occasional and inevitable 'bad roll'. Am I right?

My Uncle once joked that his biggest fear was dying with a full tank of gas!

Crazy but I know what he meant...kinda

This thread is like the TV show Deal or No Deal. I am risk adverse and would yell at the folks not walking away when they had a sure thing.

Actually, I suppose it is like every game show on TV. There is always that person trying to milk the board on Wheel of Fortune and hits bankrupt.

I guess that you don't have to worry about money since your name is Rich

Name only buddy, I can assure you.

$5 million guaranteed would pay for the kids college, mortgage and provide plenty to invest with... couldn't say no. My answer would be different if it had been $50,000 vs $1 million or perhaps even $500,000 vs $10 million.