What is a fair price?

In Uncategorized on 06/01/2011 at 6:37 am

Via S’pore Daily, I’ve been laughing at Tan Kin Lian’s grumbles on what he considers expensive fees.

His comments reminded me about a story about a locksmith. Dan Ariely, a professor of psychology and behavioural economics at Duke University and an author of books on behavioural psychology aimed at the layman, tells the story of how an apprentice locksmith used to take 30 minutes to mend a lock. When he finished, his clients would thank and tip him.

When he became more experienced, he could mend a lock in a minute. He charged the same rate. But now customers complained about his rates and refused to tip him.

Then there is a story of a famous US Supreme Court judge. The first time he was assigned to write a judgement, he wrote his judgement quickly (he had a reputation for delivering speedy judgements as a lower court judge) and circulated it to the other judges. His piece was criticised as superfical, not worthy of a Supreme Court judge. He was told to rewrite. He did no such thing. A few months, he circulated it again. The piece was praised for its scholarship. Subsequently, whenever assigned, he would write quickly but keep the pieces in his drawer, circulating them months later.

It’s about our perception of value. The longer it takes, the more valuable, is one perception.

Well in investing the holy grail is buying undervalued assets that are unfairly priced by the market, and selling them when the market overvalues them, again unfairly pricing them.

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