Economics Lessons in Curb Your Enthusiasm: Investment Decisions
Should Larry and Jeff Invest in a Car Periscope?
Curb Your Enthusiasm is in its 12th and final season this year. The series is funny, entertaining, and shows situations from real life. Many of these situations provide economic lessons and during Curb Your Enthusiasm’s final season, I will be discussing economic lessons from the series. Subscribe (for free) to get updates and support my work.
In the Season 8 episode, Car Periscope, we see that Larry David and his manager, Jeff, are considering investing with an inventor who created a “Car Periscope”
The Car Periscope can extend well above the car so the driver could see what’s going on with traffic ahead. Larry and Jeff take a prototype of the Car Periscope for a test drive and decide to invest. Naturally, things go wrong that you wouldn’t expect in real life (but completely expect in the series) and this episode gives us a good opportunity to discuss a few economic lessons.
1. Investing in any one venture is highly risky.
Most financial professionals recommend a diversified portfolio, and in the episode itself, we see Larry’s financial managers recommending against investing in this new product. Why would this be the case?
With one invention – or for most people – buying one single stock, you’re at the mercy of the performance of the one company or invention. The expected return could be 10%, but the actual return could be anything from doubling (or more) in value losing all your money. The ownership of a single stock is incredibly risky. What most financial advisors recommend is a diversified portfolio with many investment assets. You could receive the same expected return, but with much lower risk.
In 2023, the stock market had a great year, with a gain of over 20%. But much of the overall gains were due to the gains in value from seven individual stocks. Buying into a basket with a lot of stocks can not only lower risk but can also help you get the upside when a high-flying stock wildly exceeds expectations.
2. Investment decisions should be made looking at expected returns and risk
The expected value of an investment takes the expected profits (losses) from each situation and multiplies it by the probability that the event occurs. For a simple example, if a $1 million investment in an invention fails 90% of the time where the investor loses all their money, and 10% of the time the invention succeeds and the investor receives $12 million, the expected value of the investment is $1.2 million, higher than the $1 million initial investment.
However, as mentioned above, investing in any one venture is risky, so investors may require a higher expected return when investing in one single invention because there is a high likelihood of resulting in a total loss.
3. Investment agreements should be detailed and well thought out
Investing six figures to fund a new invention is risky and naturally, that’s a sizable investment. In the show, we don’t see any paperwork, and there is no discussion of ownership rights. This is not normal. For most investments, you would have a prospectus that lays out the investment made, the ownership stake in the company that this entails the investor to receive and would contain other important legal details.
In the episode itself, we don’t see any of this. Jeff and Larry are pitched on the investment, and then we see them hand over $250,000 in funding! As viewers, we don’t know what else happened, but hopefully there was a well-articulated agreement that shares how much of the profits from the investment Larry and Jeff will receive should things go well (i.e., what equity do they get in this invention/company).
How to invest is one of the more important life choices people will make, as it can make or break one’s retirement lifestyle. Curb Your Enthusiasm is great at showing real life situations, but not always showing the optimal actions one should take.
For more analysis - watch this video with me and Chris Gonzalez, Founding Team, Head of Finance @ A.Team. Chris is a former student of mine at Susquehanna and has had a great career building and selling companies, so can speak with experience on what is realistic - and not - from this episode. Plus you can see a few of these clips in action!