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.
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.
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.
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 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 ;)...
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.
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.
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.
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.
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.
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...
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!
$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.
I feel like that's so much money that it flips off the other end of the scale, though. Those dudes are so rich that their life won't change with another 10 billion, so I feel like they would take a guaranteed $500M.
My opinion is the original offer of 5M/100M presented in a Deal or No Deal scenario results in approximately 99% of the people saying "No Deal!" to the 5 Million. LOL
that may be, however I think the point is that the it’s more than the relative ratio of safe money/risk it all money, it’s also the absolute dollars involved.
In D or No D, the typical top prize is $1,000,000, which corresponds to safe money of $50,000. $50,000 may not be enough to excite people to take the offer, especially those who are recruited for a game show.
playing the lottery is essentially trading $1 in safe money for possibly millions, but the odds of winning are typically many more millions against. still people do it.