Banking

The ultimate strategy for Set for Life revealed


Game shows are big business on network television and I admit that I might watch one from time to time while eating dinner or reading discussion threads in the evenings. Of course, what constitutes a game show these days is really just a variation of flipping a coin – pure random chance. The point of these games really comes down to the same question: When should I stop? When does the risk of losing everything outweigh the reward of the next money level? The game show Set for Life is one of these shows, but they have an interesting twist.

Set for Life gives you the chance to win a set amount per month for a number of years. Each random choice can add or subtract how many years you receive your "paycheck" per month. While watching a contestant struggle with whether he should risk 20 years of $2800 payments in order to get 25 years, it occurred to me that the time value of money rendered the decision meaningless. I also came to the conclusion that I was watching one of the easiest games shows around – at least when it comes to the question of when to stop.

If you consider inflation, the present value difference between 20 years and 25 years of $2800 payments is insignificant. Figure A shows you how much inflation diminishes returns over the years.

Figure A

Time Value Strategy

There is really no reason to go past 25 years when you consider how much inflation will reduce the value of those payments over time.

But perhaps the more interesting calculation is what would happen if you saved those payments of $2800 and invested them. At an investment rate of 5 percent, over 25 years you would end up with a future value of almost two million dollars (Figure A). And, yes, I did discount those future amounts by the present value of the payments at the 3 percent inflation rate.

The moral of the story, lump sum paying game shows are better, but if you do get an annuity, which is what Set for Life is awarding, it is better to save it, putting the time value of money to work for you, then to spend it.

About

Mark Kaelin is a CBS Interactive Senior Editor for TechRepublic. He is the host for the Microsoft Windows and Office blog, the Google in the Enterprise blog, the Five Apps blog and the Big Data Analytics blog.

9 comments
GoodOh
GoodOh

So I win an annuity and instead of spending it on things I want or need I leave it all in the bank and this somehow makes my life better? Money is intrinsically worthless. It's a medium of exchange. The winner is not the one with the largest number on a bank statement when they die. Saying, you'll have more money if you don't spend any is about as useless as saying your food bills will be lower if you starve yourself to death. True but moot. Spoilt a good article by adding this last bit!

john
john

Great article, enjoyed the comments.

LocoLobo
LocoLobo

In other words Don't quit your day job?

Mark W. Kaelin
Mark W. Kaelin

My first point is that fretting for 10 minutes may seem like good television for the producers as long as viewers don't realize that, in terms of current value, contestants are fretting over hundreds not hundreds of thousands of dollars. The premise of the show is that if you win you are "Set for Life." My contention is that to be truly set for life you should keep your job to pay your bills, etc. and save your annuity in an interest earning account and retire in style -- i.e. truly set for life. I think that is highly feasible, that is if I were to win an annuity on a game show.

DadsPad
DadsPad

Contestants are picked for their interainment value. Discussing what you would do with the money or the values of payment system vs a lump sum, is like playing the lottery. You are not going to win big in the lottery or, likely to be picked for a game show. Or win if you did get picked. :) :D In other words, I agree with you. Keep your day job.

memphis10ec
memphis10ec

This thread reminds me of that part of Office Space where Peter asks Samir what he'd do if he had a million dollars...Samir: "You know what I would do if I had a million dollars? I would invest half of it in low risk mutual funds and then take the other half over to my friend Asadulah who works in securities." If I won that annuity, y'know what I'd do? . . . . you guessed it! 2 chicks at once! LOL

Mark W. Kaelin
Mark W. Kaelin

I could never jump up and down and act all excited, especially when the current value of what I'm deciding on is about $300. Rational, calculating contestants are boring, but I can live with that.

JamesRL
JamesRL

I've only watched Deal or no deal a few times. And every time, the rational person (me) sitting at home would have a better outcome than the irrational person on the stage. Because I'm not greedy. I can roughly calculate the odds and make good decisions. Now in the excitement of the prospect of actually winning, maybe that would change. I wonder if that factors into the player selection. James

pennatomcat
pennatomcat

result in boring game shows. Everyone loves it when some idiot risks all, and they love it even more when the fool is successful.