Neuroeconomics: Win or Lose $3,000? - YouTube

Hey what's up guys

Victor here with Individual Investor

I just finished reading this book  

Your Money & Your Brain

By Jason Zweig

and I really really liked it 

This book basically 

covers the concept of "Neuro-economics"

and how the emotional part of your brain  

is actually your biggest enemy when making 

investment decisions or any sort of decision  

involving money  

because of our tendency to get overly excited with the prospects of making 

money or overly afraid of the possibility of losing money

This book is full of examples and  

experiments so what I'd like to do is take one  of the examples from Chapter 9 titled:

"Regret" and share it with you guys  

Imagine that you have to choose between winning $3000

100% for sure right now 

or taking a gamble with an 80%

chance of winning $4000

and a 20% chance of winning zero

if you are like most people

what makes sense is to take $3000 right?

why not?

you can  have $3000 guaranteed right now  

So, give me the $3000

Now, let's talk about scenario two   

Here you have to choose between losing $3000

guaranteed you lose them right now

or taking a gamble with 80% odds  

of actually losing $4000

or a 20% chance of losing zero nothing

What would you do?

Here, if you're like most people you probably want to take the chance  

right? you have a 20% opportunity of losing nothing here so   

that's what makes sense

Well, for those two scenarios we actually went with the emotional decision  

the decision that made us feel 

safer and more comfortable

But, if now we take a look at the same scenarios and  

we actually apply some basic math and some logic

you'll find that actually what makes  

most sense is actually to do the opposite

of what we just did

So, let's revisit scenario one again  

and now calculate the cost of actually taking  the gamble  

If we take the gamble and we decide

to go for the $4000 with 80% chance of success

the cost of that option is 80% x $4000 = $3200

$3200 is more than $3000

which is what you would get  

if you just choose to go with $3000 guaranteed  

So, in this case

you have to go with the option of taking the gamble

because it has a greater cost here  

If you compare the two options fairly

Now, for scenario two it's actually  

The same math   

and the cost of losing $4000 is $3200 as well

So, as counter-intuitive as it sounds

what you should do for scenario two is actually  

take the option of just losing $3000 straight  

because if you go with a gamble 

then the cost of that option is actually higher   

$3200 than losing your $3000

So, the math is pretty clear

and what is also clear is that the emotional part of the brain  

can cloud our logic or judgment especially  when trying to make decisions that potentially  

involve losing money

If you're still not too comfortable or convinced that this logic is  

the best way to go let's extrapolate the two  scenarios and imagine that instead of having  

to make that decision once  

you have to make that decision 100 times or 1000 or even 10000 times 

What would you do then?

The only way you can guarantee that you will be better off on  

average after all those iterations

is actually by going with the math and the probability  

This is no different than having to toss  a coin a hundred thousand times and having  

to guess on average

what the outcome of the task would be

All right, I hope that you guys  

enjoyed this little exercise

and also that you learned something new today  

I would really appreciate if you can please  like my video and subscribe to my channel  

so that I can continue to make videos like this  for you guys

Thanks again and I'll see you soon