You're stuck with what you endow
-------------------------------------------------------------------------------- You may have bought a dud stock at a fancy price. But you stick with it in the vain hope that it will appreciate and feel any decision to sell in the meanwhile would make you look a bit foolish. Your choice of staying invested is already endowed with the sum of money spent initially. -------------------------------------------------------------------------------- D. Sampath Kumar It is a facet of human psychology that charlatans of the stock market have exploited to the hilt. Economists have studied it and labelled it the 'endowment effect', no doubt with a disapproving shake of their heads. Now clever entrepreneurs have stepped in to take a shy at your purse - this time with the promise of goods at a fraction of the true cost. This is how it works. You buy a minimum bundle of 30 tickets paying 75 cents (to the US dollar) a piece. Each ticket confers on you the right to put in a bid (the 75 cents is akin to a premium on a call option without the exercise price). Armed with these vouchers, you can now put in your bids for camcorders, I-phones or whatever it is that catches your fancy. If your bid is the highest one standing at the end of 15 seconds the merchandise you have bid for is yours, no matter what the intrinsic worth of the product is. Of course, if your bid is upstaged by a better one, and the process is repeated 30 times, you lose all of the $22.50 invested in purchasing those tickets. Would investors go for it? More to the point, would the model work? Apparently, yes. The Internet based auction site now even has a phone-in facility for its European players. So, what exactly is at work here? Imagine that you are setting out from home on a shopping errand. You wonder if you should take an auto-rickshaw or a bus. Even as you are reflecting on it you have reached the bus-stop. On an impulse you decide you will take the bus ride after all. Sticking with it The fact that engaging a rickshaw also means a tedious process of beating down the asking price from twice what you would have liked to pay and eventually settling for something well above that, makes the choice just that bit easier. You wait for a while, and nothing happens. A five-minute wait soon becomes 10 and before you realise, it is already shot past the 15 mark. You now begin to fret about the delay. So, would you decide to chuck the whole idea and choose instead to travel by auto rickshaw? Chances are you wouldn't. You reason that you have already invested 15 minutes and the bus may be just round the corner. Hence it doesn't make sense to give up. So you end up waiting a while longer. The wait becomes almost interminable to the point where you are happy to see even a bus go by in the opposite direction hoping perhaps that sooner or later it would make the trip on your way. No matter how long the wait lasts, you refuse to budge from your initial decision. Each time you are confronted with the question the reasoning remains always the same and no less impeccable. It always boils down to the prospect of the very next minute that the bus might arrive and not the time you have already invested, which by implication doesn't count. You also feel that the choice in favour of an auto rickshaw at that late a stage over a bus ride makes you look absolutely silly to an imaginary crowd of onlookers - a prospect made worse by the fact that as you look back after boarding the auto you might espy a bus turning a bend in the road and coming into view. Hoping for jackpot In other words, the amount of time that you have already endowed in favour of a bus ride influences your decision to continue to stick with it - hence, the 'endowment effect' in behaviour. So it is with stocks. You may have bought a dud stock at a fancy price. You stick with it in the vain hope that it will appreciate and any decision to sell in the meanwhile makes you look a bit foolish. Your choice of staying invested is already endowed with the sum of initial money, just like the time spent waiting for the bus in the above example. The trick is to get the average citizen invest that initial sum of money and the 'endowment' effect kicks in. It ensures that you don't pull back once you have plonked a few of those chips on a piece of merchandise you bid for, initially. Why would you invest $22.5 in the first place? A lot of people think that the chance to hit the jackpot of a plasma/LCD TV from Panasonic, or anything else they covet, for just $22.5 is a fantastic deal. For investors in India, the prospect may yet be unattainable. The game might fall foul of the rules of the Reserve Bank of India, which may not take kindly to Indians charging $22.50 on their credit cards on games of chance. In case you didn't know, the Enforcement Directorate is known to go after people other than those belonging to the Anil Ambani Group too! http://www.thehindubusinessline.com/iw/2008/12/21/stories/2008122150340700.htm Deeds, like seeds, take their own time to fructify. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
