I read about something called the “Coin Toss Law” in Cashing In on the American Dream by Paul Terhorst.
Paul says, “Simplify your life by having only the things you need or want. Consume less to enjoy life more. Living with this new state of mind works because of what economists call the Law of Diminishing Marginal Utility. I call it the Coin Toss Law.”
The example he gives works like this: Two people bet a small amount on a coin toss. It’s no big deal, even as the amount of the bet starts to increase. But increase the stakes enough, and the people will stop the game. He gives the example of a person offering to put up a $500,000 prize vs. the other person’s entire net worth.
Not surprisingly, most people aren’t willing to bet their entire net worth on a coin toss. It’s too risky, they feel. (Even though the odds are exactly the same as when the bet was for $5 or $50.) Losing their entire net worth would put them in bad shape. They’d be wiped out, and have to start over from scratch. Winning $500,000 would be nice, but the potential changes that could bring about wouldn’t have nearly as big an impact as losing everything you own.
Paul puts it this way:
The Coin Toss Law means that the upside, past a certain point, isn’t all that great. If you already have forty pairs of shoes, adding ten more isn’t a big deal. If you already have a Mercedes with a small engine, getting one with a bigger engine is a cheap thrill that costs a fortune. Buying a new car makes you feel good, but it doesn’t excite like that first clunker when you were sixteen. A bigger house can be pleasant, but it brings bigger problems as well.
It’s food for thought.