Benjamin Graham’s famous question that all investors should ask themselves before making any purchase decision (On what terms, and at what price?) even applies to the game show “The Price Is Right” as well.
Check out this recent anecdotal article written about contestants from the famous game show:
One of the mainstream appeals of a show like “The Price Is Right” is that it allows financially illiterate people the opportunity to receive a good or service that they could not otherwise afford. Even though it is irrational (and in some ways even perverse), no one wants to see the guy with a fully funded 401(k), a hundred grand in emergency savings, and a taxable portfolio stuffed with blue-chip stocks take home a $75,000 Jaguar. You want that car to go to the widow raising two children on $40,000 per year because you know that if they do not win that car on a game show, they’ll never own that kind of luxury item during their time here on earth.
But there’s one catch: taxes.
If you win that $75,000 Jaguar, there is a good chance you could be looking at a tax bill in excess of $25,000 for the chance to claim your “free” prize.
This is why you do not want to win on The Price Is Right:
- First of all, many of the prizes are grossly overpriced and are the kind of items that you do not even desire. Someone recently won some talking trash cans that automatically open up (estimated retail value, over $4,000). A cool prize, to be sure. But they likely had to pay $1,500 or so for it, and that is unfortunate because it is a gimmicky item that won’t improve your long-term quality of life but will consume a chunk of your cash flow to purchase.
- A lot of the items lose their value quickly. The quickest way to take the joy out of buying a brand new car? Calculate how much less you will be able to sell it for a few minutes after you drive off the lot with it. The guy who paid $1,400 in taxes for those talking trash cans probably won’t be able to sell them for $1,400+ on EBay or Craigslist, even though the item is supposedly worth $4,000+
- Not only do most prizes lose value over the long term, but they will consume your immediate cash flow in order to do so. When you win a $75,000 car, you’re basically winning the option to purchase a new car for a 65% or so discount from the retail price the show mentions. You’re not really a prize winner, but rather, you are inheriting an option to buy a good or service at a steep discount.
And I haven’t even touched on the brutal psychological factors associated with doing the financially sensible thing. Because none of the prizes are transferable to cash (i.e. you can’t turn the $75,000 into a cash prize that would allow you to pocket fifty grand), you are faced with the option to either pay $25,000 for the Jaguar or walk away with nothing. If you choose the latter, you have to be the one who faces your spouse, kids, extended family, and friends, and explain to them your decision. When expensive shiny objects get involved, good luck explaining opportunity costs to anyone.
That’s what I dislike about the structure of the game—a lot of times, these “winners” are living paycheck to paycheck and superficially think they just got lucky. Often times though, they either walk away with nothing because they cannot afford the tax bill or they mortgage their future with loans to pay the tax bill so they can claim their free prize. Sure, they are adults and they are responsible for their decisions. But the game show producers don’t hesitate to use their information asymmetry to prey upon the psychological naivete and irrational exuberance of their winners, and this creates a huge mismatch between what gets advertised to you on television and what happens behind the scenes to the contestant. Winning on The Price Is Right isn’t the blessing you think it is. In most cases, it introduces a complicated cost-benefit calculation into your life because you’re dealing with paying 35% for an overpriced good that you probably didn’t need anyway.