Thinking Like An Entrepreneur Small Business Book
How can I order
Thinking Like An Entrepreneur?

Online Guide To Starting A Small Business

State-By-State Small Business Resources

Articles about Entrepreneurship And Small Business by Peter I. Hupalo

Small Business Resources & Links

Book Reviews of
Thinking Like An Entrepreneur

Thinking Like An Entrepreneur
Table of Contents

Chapter 3
Men Are Cheaper Than Guns

Chapter 4
Intellectual Capital And Bootstrapping

Thinking Like An Entrepreneur


So You Want To Be A Millionaire?

Nearly everyone is watching a new game show called "Who Wants To Be A Millionaire?" and enjoying it. The people getting on the show are also enjoying it. And, why not? Winning money, or the chance to win money, is fun. Even watching somebody else on TV winning money is fun.

Some might say that playing the game is fun, or they want to test their knowledge, but winning money is what excites many viewers. Just like many people have little real interest in the Internet and its technology, but are very interested in the new wave of Internet millionaires (pardon, billionaires), people like thinking about easy money. The more of it the better. It's the thought that they can answers questions correctly which are winning other people money which excites them. They can imagine how well they themselves might be doing on the show!

But, what if we just told a new game show participant, "Imagine winning $1 million dollars." While it would capture their attention for a bit, soon they would stop contemplating it. They need more to ruminate on.

People like contemplating decisions (not actually making their mind up completely about them, mind you, just contemplating them) where all the possibilities consist of positive outcomes. This is fundamentally the reason contests often offer choices. Choice A: Win $50,000 for life or Choice B: Win A Million Dollars immediately.

It doesn't matter that in some cases many of the direct mail contest promoters invariably know which choice 99% of the winners will make. Sure, they could just give you the choice you will most likely choose and simplify your life and save you some time. But, they don't do this. They want to involve you as an active participant. They want to empower you as a decision-maker and give you control of your life by having choices.

They don't want you to just drop your entry card in the mail. They want you to sit and look at it and speculate. To bounce back and forth between your options. And, as you are doing this, maybe you will give some thought to which products you might want to buy that were offered with the contest!

A key aspect of successful marketing is often letting the buyer feel that he is in control. No one likes being told they don't have options and choices. We want it to be our decision. Studies have shown that the more you try to restrict what someone else feels are rightfully his choices, the less likely he will agree with you. Offering a second option, even if the option is never selected, is often smart marketing.

So, do you want to be a millionaire? ...Is that your final answer?

Let's assume we know the answer. And, we will fire the producer who decides that a better title for the show is "You Want To Be A Millionaire Because I Say So."

Marketing Lesson from Game Show: Give your client or customer options. Put them in control.

Oh, but little contestant, you are not out of decisions yet! The show still offers a great introduction to the topic of risk aversion. We will now give you decisions each step of the way to becoming a millionaire. We will test your resolve and your risk aversion. We will start making the questions more meaningful and more difficult for you to really say, "Yes, I want to risk losing what I have to become a millionaire."

People are risk adverse, or as I say in Thinking Like An Entrepreneur, many people are Bernoullied. (Daniel Bernoulli was the first mathematician to show how people make investment decisions, not just from a mathematical risk and reward standpoint, but from an emotional standpoint.) We value what we already have more highly than what we might get. In short, losing $64,000 is more painful than winning $128,000 is pleasurable.

Let's examine a short series of game-show decisions to see this.

We start with $32,000 you have already won. You are given the opportunity to try for $64,000 by correctly answering a question and are told you get to keep the $32,000 even if you answer wrong.

Do you go for it? Obviously, yes. This is my favorite type of business decision, a no-brainer. No risk, but possible reward. Even if you miss the question, you will leave the show a happy participant. You are no worse off for trying.

You answer correctly and now have won $64,000. Suppose you could risk it and chance winning $125,000 total. Suppose you feel you have an even 50% chance of winning and a 50% chance of losing on the next question. OK, we might have four questions, but you feel you can eliminate two of the four possible answers, so even if you are only guessing, you have a 50-50 chance. No lifelines or other fall backs.

Do you go for it? The choice of going for $125,000 has slightly more merit than not trying, from a financial mathematics standpoint. This is because you will never lose the $32,000. So your possible upside gain is slightly more than your possible downside loss and we have assumed you have a 50-50 chance of answering correctly and winning. (In fact, you can, using expectation values, calculate the value of the decision to try for the $125,000)

But, some people won't go for the $125,000. They are Bernoullied at the $64,000 level.

Watch who will stop at $64,000. Often students with loans to pay off or other people who feel like $64,000 is a lot of money will stop. Their answer is "No, I don't want to try to work to become a millionaire on this show, if it means I could lose $32,000." Now, that's not a bad decision, but it's important to understand that this contestant never really had much chance to win $1 million on the show. They were psychologically Bernoullied at $64,000. They simply would not risk advancing, unless they knew the answer with certainty.

Winning another $61,000 is less important to them than the fear of losing the $32,000 they could lose if they answer incorrectly.

Similarly, assuming your money could double each time, you could become Bernoullied at $125,000, $250,000, or $500,000 before you ever had a real chance of becoming a millionaire. (actually, the amounts would be $128,000, $256,000, and $512,000. But who am I to blow against the wind?) Again, I'm not saying that stopping is bad. Just that you have a real decision to make at each level and that your own personal risk tolerance could inherently prevent you from winning a million dollars in the game.

This same factor often prevents investors from seeing how they would have fared by investing in a successful stock. Many are fond of thinking, "Gosh, that stock went up 20 times. If only I had put $5,000 into it, I'd have made $100,000!" Not necessarily. What usually happens, if you had actually bought the stock, is that you might start to feel uncomfortable with a large percentage of your portfolio in one particular stock as its price rises. So, you sell shares. You rebalance your portfolio. And, because of this, your initial investment grows by less than the 20 times.

Again, I'm definitely not saying rebalancing your portfolio is bad. I'm just saying that risk aversion is a very real factor to consider when contemplating the real upside of any given investment. At some point, you will want to "cash out" and not "let it ride" to use gambling terms.

Investment and Business Lesson from Game Show: Risk aversion affects realizable returns. But, you probably won't be aware of the psychological limitations in your best preplanning.

Who says TV isn't educational?