Let's make a deal question.

[Scanner]

Yeah, I am just posting one of these "thought experiments", purely academic, to make you (or maybe moreso me) think about how valuable liquidity is in a portfolio and what kind of premium you should pay for it.

I probably didn't make the choice "interesting" enough. . .because personally I value liquidity more than the average person and maybe that's by my current lifestyle choice, whatever.

It could also be framed another way - how much resources do you allocate towards savings and how much towards "investments" since they tend to be equities and often less liquid (not always though. .. a stock can be sold in 3.4 seconds but not in a 401(k) or Roth without consequence).

You know. . .I bet sweepstake companies really know this science. . .if you ever notice, it's like a $25,000 car or $10,000 in cash and you lick your chops at different ones, depending on who you are.

[disneysteve]

I bet sweepstake companies really know this science. . .if you ever notice, it's like a $25,000 car or $10,000 in cash and you lick your chops at different ones, depending on who you are.

I don't think I've seen an example with that big of a gap but I have seen gaps. I always just assumed it was because they were advertising the sticker price of the car rather than what they actually paid for it, so offering a 25K car or 20K cash would make sense.

Also, in that case, you have to pay taxes on the prize. If you take the cash, you can pay the taxes out of the cash. If you take the car, you need to pay the taxes out of your own pocket, which not everyone can afford to do.

[buildmybudget]

I don't know if you can turn this into a generality...I think it very much depends on not only the amounts, but the timing of the options for each individual making the decision. Like the stock market, people may not think rationally depending on the circumstances...

[Broken Arrow]

I value liquidity more than the average person and maybe that's by my current lifestyle choice, whatever.

Well, personal finance IS personal. If I was a lot more stable with my job situation, I would place a higher priority on long term investing rather than short term savings.

Notice how I didn't mention anything related to market performance, including liquidity.

And that's the thing. There's nothing wrong with giving up liquidity in exchange for higher returns, but it just depends on our individual financial situations.

(not always though. .. a stock can be sold in 3.4 seconds but not in a 401(k) or Roth without consequence).

Not to be too picky, but there would not be a tax consequence in a Roth. It's one of the main reasons why I trade stocks in a Roth.

[Scanner]

There's all kinds of ways you can kind of play with this "thought experiment" too. . .like:

Would you rather have $35,000 donated to a retirement portfolio or $25,000 into a taxable account? If you liquidate the $35,000 immediately, you are left with 90% of it (because of tax penalties), a little more than the 25K. . .however, you have the emotional loss of taking it from your retirement account (and knowing you are paying the gov't).

Sure. . .$35,000 sounds better. . .will probably grow to $100,000 by the time you retire. Punch the numbers with time as a commodity and the larger number always seems better.

But. . .it's only worth more if you make it that long. . .lol.

I bet there are formulas for figuring this stuff out in the accounting world - putting a number on "lost opportunity" and "freedom".

Even in the house example. . .a house is always a great asset to have to borrow against.

[Scanner]

DisneySteve,

I am not a "sweepstakes" person by any means but what I have always noticed is that the cash awards are always substantially less than the "asset prizes." (depreciating always in a sweepstakes)

I think the reason is two-fold - the reason I am talking about. . .and also they probably cut deals with the "car company" or "stereo sets" of free advertising in exchange for doing a sweepstakes so they are probably getting a deal. . .kinda like the Price Is Right - all that stuff is given to show for free but they get a little blurb telling you about the Kruk Ultracoffee maker.

You know. ..all that Price Is Right music and crying, happy contestants jumping up and down at the thought of winning a brand new Ford Ranger complete with a new heater (lol) and California emissions is worth something to Ford.

Anyway, cash is always less than the "asset package", at least what I have noticed.

Give me the cash, lol.

[disneysteve]

There's all kinds of ways you can kind of play with this "thought experiment" too. . .like:

Would you rather have $35,000 donated to a retirement portfolio or $25,000 into a taxable account?

And the answer to that one might depend a lot on the stage of life of the person you are asking. If you would have asked me that 15 years ago, I probably would have taken the 25K. I was just starting out, recently married, buying a house, paying off student loans, etc. I would have benefited more from the 25K that I could easily spend right away.

Today, I would prefer the 35K in the retirement account. We own our home, have no debt and have substantial savings. I'd benefit more from the boost in our retirement savings.

[Scanner]

Buildmybudget,

No, you can't turn this into a generality but I still think general "thought" experiments are valuable in sometimes a decision can come down to 1 or 2 factors and usually 1 of those factors is emotional, you know?

I think half of investing is knowing yourself.

Like BA noted, personal finance is personal and I have found, really, really good managers of money are able to almost put a "number" on this stuff to help make a decision easier.

I think a lot of it is intuitive. Intuitively, DS and BA went for $75,000 vs. the $100,000 assessed undeveloped land land, even if as the buyer I flipped it 1 year later for $120,000 let's say. It may have been a win/win deal though because I met the point in that they value the cash.

But intuition doesn't always work because it's often one of those "touchy, hair on my neck thingies." That's why Deal or No Deal is really a great show. To watch people making emotional decisions (and I think they are psychologically profiled/selected to be risk-takers ).

In that show, I may actually be the one to think it's a good deal to take $20,000 early on and walk away, instead of speculating the unopened cases have more.

Okay, not sure how this evolved to game shows. . .but I guess I am trying to merge emotions and finances together into a cohesive topic. The really fun game shows to watch IMO are the ones that watch human behavior - Let's Make a Deal, the Price is Right, Deal or No Deal and watch the decision making process unfold.

If you think about it, in Deal or No Deal, they go through all the investment steps - they consult with their advisors (the audience, family), they are speculating, assessing principal risk, - a whole investment career unfolds in 40 minutes, LOL.

[MonkeyMama]

And the answer to that one might depend a lot on the stage of life of the person you are asking. If you would have asked me that 15 years ago, I probably would have taken the 25K. I was just starting out, recently married, buying a house, paying off student loans, etc. I would have benefited more from the 25K that I could easily spend right away.

Today, I would prefer the 35K in the retirement account. We own our home, have no debt and have substantial savings. I'd benefit more from the boost in our retirement savings.

Agreed. I was thinking mostly the same thing. I would take the $25k cash over $100k investment, if I NEEDED cash. Thing is, I have no debt, and my cash savings is ample. The chance to add $100k to my retirement is worth more to me than almost anything else, TODAY.

If I was 20, I'd probably take the cash. Over $100k or $35k or whatever. The cash would have been more useful in my younger years.

[Slug]

I say "no brainer" too. I'd take the 100K condo and immediately put it on the market for well below the going rate but high enough that I'd walk away with more than 25K after all expenses and taxes. If it is worth 100K, surely I could find a buyer at 75K or 65K or 50K.

My tactic as well.

PS I would also take $100k in gold, silver, diamonds, land, even automobiles over $25k in cash.

[Broken Arrow]

Scanner, I think I understand what you're aiming for, but I maintain much of this will depend on the specifics of the situation.

If you want to know what I believe as a base principle here, then it would be to crunch the numbers and select the answer that will give me the overall best value, given my current financial situation.

If taking cash makes the most sense, that's what I'd do. If taking illiquid assets make the most sense, then that's what I would do instead.

[Scanner]

No. . ."it depends" wasn't allowed.

Foul!

LOL. . .but maybe I'll try that in Deal or No Deal. . ."Well, I choose Case 16. . .but if it's $500,000, I'll take a deferred payout of my prize money."

[disneysteve]

I find Deal or No Deal to be aggravating to watch. Aside from the fact that they draw things out too long, the people make ridiculous choices that can't possibly turn out well. I'm sure they are coached in advance to "go for it" at all costs. When you have a player with all kinds of life issues who turns down a 6-figure offer to keep going when the odds are greatly against them, I really have to wonder how "real" the reality of the show is.

[Scanner]

Yeah, game shows are divided into 2 categories - games that are challenging and fun to play - like Pyramid or Jeopardy.

And then there's "psychological" ones, which are more really "entertainment" and a testament to human behavior - to put people in a TV production-imposed pickle and watch them react - choose between the thrill of reward or the fear of loss. I mean, Deal or No Deal isnt' that hard. A little basic math and you have it figured out. However, that being said, the emotional component is the wildcard. I would certainly be thinking odds. . .but crap. . .I know also I would be thinking the thrill of more six-figure money too. Maybe one more round. . .

I like them both equally and even the aggravation you mention is part of the fun of watching.

Yeah, I do think it's kind of unreal. . .I mean, can you imagine an entire country getting caught up in some kind of emotional, irrational mass exhuberance of housing and credit, making major life decisions on emotion? People are smarter than that, right?

Never would naturally happen in a million years

[disneysteve]

I just thought of an excellent example for this topic.

I do a lot of online surveys that pay me with Amazon gift cards. I do so many that I literally get them faster than I can spend them. Right now, I have over $800 credit in my Amazon account and that's after buying all of my daughter's Chanukah presents and a few other things in the past couple of weeks.

I started a thread a week or so ago asking for suggestions of what to do with them. One person suggested selling them on ebay which is just what I'm going to do. I got a $30 certificate today and will post it on ebay with a starting bid of $20. It will probably sell for very close to $30 but I'll lose about 15% to fees so I'll end up with somewhere around $25 most likely. I'm happy to have $25 cash that I can use for anything rather than $30 credit that I need to figure out how to spend.