“I can calculate the motion of heavenly bodies, but not the madness of people,” reputedly exclaimed the famous physicist Isaac Newton after losing his fortune in the South Sea stock swindle. While not necessarily calculating the “madness of people”, behavioral economics has made great strides in at least documenting this madness. Introductory courses in the field present students with survey results that show the inherent irrationality of the average economic actor. A typical question from these surveys gained some attention on social media recently and is presented below:
You are presented with two buttons. You can only press one. Pressing the red button will give you an instant $1 million, while pressing the green button will give you a 50% chance at $50 million, which one do you press
The conventional rational answer is to pick the green button because it has the much higher expected winnings – (0.5) * ($50 million) = $25 million versus $1 million for the red button. Those who pick red are often mocked for their apparent inability to understand basic probability concepts. Yet could there be reasons given that make this irrational madness appear rational? Maybe.
First of all, what do we know about the provider of this game? The financial world is filled with fraudsters and flim-flam men who show up out of the blue and make grandiose promises of instant riches without any intention of fulfilling their obligations. If you press the green button, how do you know this button genie will give you an actual 50-50 shot at the $50 million. Does he have an audited track record of accurately bestowing button-based prizes? What regulatory agencies does he report to? If you press the red button, there is no question what your reward should be, and if the game is a fraud, you will know right away. The importance of working with people who have a long track record of fair dealing in the financial world and of being cautious around people who do not have such a track record cannot be overstated and such instincts should carry over even into rudimentary probability problems.
Secondly, even if the button-game is fair, there are times when you should consider more than just the expected return in an endeavor. The green button option carries much greater volatility than the red button option. If we were to repeat this game over and over again; then sure, picking the green button is the obvious right way to proceed, but the problem is presented as a one-time opportunity. For many investors who have either a limited time horizon or pressing liabilities, the volatility of their assets can become an overriding concern. As almost every investor gets older, they will include more and more fixed income in their portfolio in large part to reduce the effect of volatile equity price swings. In such circumstances, the zero-volatility red button option can sure seem like a rational choice.
Ultimately, maybe the best option for someone presented with this scenario in real-life would be to sell their button-pushing equity to a larger financial entity like a hedge fund. Assuming the game is offered once to a large group of people around the world, an organization with significant capital could buy up the individual button-playing rights and thus make the game repeatable geographically if not chronologically. If there was little paperwork in transferring game-play privileges, you might be able to sell your stake for close to $25 million.
Past performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
There were no trades in EWM Investment Solutions models during the week ending on August 27th, 2022. All major domestic equity market sectors are currently in a neutral trend, while international equity remains in a long-term unfavorable position.
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Julee Sarto, Private Wealth Advisor, was voted the #1 winner for Best Financial Advisor in the Cadillac, Manistee & Ludington region of the 22 Red Hot Best Contest!
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Planning for college is a major event in your child’s life child and for you as their parent. Navigating the world of college loans and securing funding can be overwhelming the first time you are faced with funding school. Read more to learn other ways you can plan for college!
Written by: Albert Herzog IV, CFP®, CRPC®, Director, Private Wealth Advisor
U.S. President Approves Trade with Center of the Earth Mole People
The 6th president of the United States, John Quincy Adams, approved the funding of an expedition to the center of the Earth. Part of the plan was to establish trade with the inhabitants believed to live there, the mole people.
Adams was a total believer in The Hollow Earth Theory. The theory proposed that the Earth was virtually hollow, with openings at both the North and South poles. Once inside, there would be a series of concentric layers containing an underground world. This world was illuminated by a sun-like heat and light source at the very center of the Earth. The expedition would have one hundred men head to the Arctic, traveling by sleighs pulled by reindeer to the North Pole and accessing the entry to the Earth.
Leader of Expedition, John Cleves Symmes, Captain of the Ohio Infantry: “TO ALL THE WORLD! I declare the Earth is hollow and inhabitable within; containing several solid concentric spheres, one within the other, and that is open at the poles 12 or 16 degrees; I pledge my life in support of this truth and am ready to explore the hollow, if the world will support and aid me in the undertaking.”
Historians surmise that Adams had one of the highest IQs of any president, to put the matter of intelligence to rest. The Hollow Earth Theory was famous in the early 1800s by leading scientists. Even so, the expedition did not happen before Andrew Jackson assumed office and buried the idea as far underground as possible.
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on August 19, 2022 to closing price on August 26, 2022
1 Month = closing price on July 26, 2022 to closing price on August 26, 2022
3 Month = closing price on May 26, 2022 to closing price on August 26, 2022
YTD = closing price on December 31, 2021 to closing price on August 26, 2022
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