The Hindu Business Line : Beer, cheer and stocks

Consider this: You visit an export garment shop. You find a branded shirt for Rs 500. The same shirt costs Rs 750 at the brand's retail store. Yet, you may not hesitate to buy the shirt at the branded store. My friend and I were witness to such an incident recently, where a prospective buyer said that he would rather pay a higher price and buy the shirt from the branded store.

If you decide to buy a product, you should prefer the shop where the price is lower. So, why do we behave differently?

The reason is that it also matters from where we buy a product. Richard Thaler, a well-known behavioural economist with the University of Chicago's Graduate School of Business, conducted a study called "Beer on the beach" to assess such behavioural patterns. He found that people were willing to pay a price that was higher for a beer bought from a fancy resort hotel on the beach compared to the same beer sourced from a small grocery shop.

Such behaviour also applies to the way we buy stocks! Meir Statman, a pioneer in the field of behavioural finance, attributes this to sentiment or what he calls as the value-expressive characteristic.

That is, we may be willing to pay a higher price for a stock for the pleasure of owning it.

Perhaps, that is why Wipro and Infosys command a higher price-earnings multiple compared with their peers in the industry.

(The author is a Chennai-based financial consultant)

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