In 2011 cricket world cup, India had entered the Quarter finals in World cup and I fancied a chance of India reaching the finals to be played on Wankhede. I reached out to a close friend with strong connects and was able to source tickets for World cup final whose MRP was Rs 7k each for an offered price of Rs 13k each. As India defeated Pakistan in Semi Finals, the grey market price for the tickets soared for the same was Rs 1 Lakh. TOI Article
This presented with a Dilemma. I would have not have been able to afford a ticket for the finals at Rs1 Lakh. I did not see the marginal utility at watching it for 1Lakh and selling the tickets should be right rational decision.
I ran a poll on Twitter recently on whats the Cost of the Ticket and the answer to this was an overwhelming value “Priceless” with the hindsight knowledge of we winning it. The reason I exercised the option to watch the cricket match was the “House Money “effect. My mind assumed the increase in ticket price as a Windfall gain.
|The House Money Effect: Isn’t money Fungible?|
Casinos have found out that gamblers are far more likely to take big risks with money that they have won from casino (ie. House money). Also, gamblers are not as upset about losing house money as they are about losing their own gambling money.
People tend to segregate money into buckets:
Precious money earned through hard work and sweat. (Salary, stocks gains, business profits etc).
Less Precious money from Gambling. (Casinos, Lottery tickets etc).
But isn’t the buying power of money the same for “Precious money” or “House money”.
In an earlier blog we talked about Loss aversion and how losses makes us 2x more unhappy then Profits make us happy. Well but losses of “House Money” does not tend to make us as unhappy as losses of normal income.
Will you sell your House?
I did not sell my tickets because I saw it as a windfall gain. The same applies for real estate bought for personal use. If real estate prices sky rocket would it not be rational to sell away your home (Just like stocks) and buy it later when prices are more rational. Most of us will not do that as we attach sentimental value to our home. However, it would be a right move if you are rational. Meet Sankaran Naren, Who sold away his home in 2012-13, because real estate prices didn’t make sense to him.
Excerpts from an Interview – Sankaran Naren, CIO ICICI Prudential AMC . Full interview here.
Saurabh Mukerjea : On the converse side, you took a contrarian position and it worked out like a dream.
A: I think the most contrarian position I took was actually outside equities; in real estate. I used to see everyone buying real estate between 2007 and 2013, and you know I had seen in 2007 most of the infra stocks was pricing in 2014 earnings.
So, when you approached 2012-13, I saw a number of people buying projects under construction real estate, what could come 4- 5 years later or 7 years later, from builders whose antecedents were not clear.
I could see there was a reasonably large bubble in real estate and I said I don’t need to stay in my own house so I ended up selling my flat in Chennai and Bombay, and I have been very impressed that in 5 years that the real estate prices have gone nowhere, and people ask me how did you come to the conclusion. I said I used a simple equity technique for valuation.
No one understands the valuation of real estate. So I looked at rental yields and at mortgage interest rates. In the US, at the same time when Indian property prices were high, rental yield was much higher than the mortgage interest rate. Whereas in India there was a 7 percent gap. That means the mortgage interest rate was nine and a half percent, rental yield was 2 percent. I said the seven and a half percent gap can’t continue.
So, that was a fairly good contrarian call because it was a scale call. Because the number of people who made mistakes in India in real estate, in that period is not small.
“House Money effect” is seen very actively work in investing. It is very common for people to sell half of their Stock holding after a stock doubles, the argument is that they have now taken out their initial capital invested and their is no fear of loss. Once they have taken out the intial capital , Investors are more prone to hold on to the remaining stock even when their is evidence to the contrary. Also, Recreational Poker players after a big tournament win are more likely to indulge themselves.
How to Fight the “House Money “effect
Let’s say you want to gift a friend a Gym membership, a Season pass for Theatre Festival or Club Mahindra membership. There is a chance that the gift might not get utilized. Instead of gifting you should ask the friend to purchase it and reimburse it only when he uses it. This will add an incentive for your friend to use it. Whenever, we friends go on a sponsored holiday, Tickets are purchased individually and reimbursed only on travel by the host, so that there are less Dropouts. Also, when you get a free Complimetary suite in a Casino after big wins ( Like in Movies), remember they want the “House Money” back.