DR. DAWNE MARTIN DEPARTMENT OF MARKETING Show Me the Money

Savings Let’s suppose that you decide to save $50 per month starting at age 18 and ending at age 65. How much money would you have in your savings account? Total amount saved  47 years * 12 months * $50 = $28,200  Is that how much money you will have in the future?

Compound Interest How much money would you have in your savings account if you earned  2%?  4%?  8%?

Risk From an investment standpoint risk is the chance that you will lose some (or all) of the value of your investments. How risky are you? You have the following choice for your salary in the first year that you graduate:  $50,000 for certain  A coin-flip where you get either $100,000 or $0

Probability What is more likely?  Two people in this room have the same birthday  Somebody in this room has a birthday on October 31  Two people having the same birthday is actually much more likely You have to understand the role of probability in making investment decisions  Relates to risk

Savings Game Start with $1,000  You need to pick a risk category  High risk earns 2X the market return, Medium risk earns the market return, Low risk earns ½ the market return.  Market returns will be determined randomly.  Each “round” represents 5 years. We will play four rounds.  You can change your risk category after the second and third rounds.  Goal is to end up with the most money at the end of the game.

Savings Game In addition to ending up with the most money you have to have:  $500 at the end of round 2 to put a down payment on a car  If you don’t meet the goal, you lose $1,000 on your ending total.

Round 1 We will randomly choose a card from a deck of cards.  Red means loss, black means gain  Amount of gain/loss equal to the amount on the card, face cards all 10% gain/loss

Round 2 If the market went up in Round 1, it is likely that the market will go down in Round 2. If the market went down in Round 1, it is likely that the market will go up in Round 2. I will now remove one suit (red or black) from the deck of cards and we will draw again. Remember  You need $500 at the end of Round 2  The probability of the market going up/down has changed. It is not random any more.

Round 3 Risk aversion…choice of certain vs. uncertain payoff  You can either go up 5%  Risk doesn’t matter here. If you choose this you get 5%.  I will flip a coin, heads the market goes up 10% tails the market goes down 5%.  Risk matters if you take the gamble. High risk gets 2X market, medium risk gets market, low risk gets ½ market

Round 4 Roll the Dice  I will roll two dice…  5, 6, 7, 8, 9 the market goes up 10%  2, 3, 4, 10, 11, 12 the market goes down 5%  Think about the odds, what is most likely to happen?  Choose your risk level carefully this is the last round

Rounds 1, 2: Card Draw RedLowMediumHighBlackLowMediumHigh J J Q Q K K A A Round 3:LowMedHigh Choose 5%: 1.28 Heads: Tails: Round 4: LowMediumHigh 5, 6, 7, 8, , 3, 4, 10, 11,