The Independent Market Observer

6/4/13 – Book Review: Priceless: The Myth of Fair Value (and How to Take Advantage of It)

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jun 4, 2013 10:43:03 AM

and tagged On My Bookshelf

Leave a comment

Not long ago, I reviewed William Poundstone’s Fortune’s Formula, a very good and relevant book about the common mathematical roots of gambling and investing, which I originally picked up as part of my poker-playing research.

Poker is based on probability and, to a much greater degree, on psychology. I did all right in my poker playing, ending up well in the black, but ultimately became much more interested in the markets, which is why I’m doing what I do now.

Behavioral finance is the study of psychology as it applies to investing and portfolio management. Researchers have identified many different behavioral biases that can damage an investor’s decision-making process—information that can be incredibly valuable to practitioners. What is usually presented, though, are facts and applications, rather than the underlying research.

In Priceless, Poundstone takes the opposite approach. As in Fortune’s Formula, he walks readers back through history, introducing us to the people who developed the ideas and then following those concepts into the present. As a result, you not only understand the idea but the context from which it arose and how it evolved over time.

This type of background is helpful in grasping the concepts Poundstone presents, like the lack of solid basis in how prices are constructed. Anchoring, for example, is a well-known behavioral basis. Showing how this bias plays out in multiple contexts, such as the two-offer ultimatum game, alcohol-fueled negotiations, or money illusion in Zimbabwe, offers a much clearer picture—to me, at least—than the typical presentation.

Beyond context, Poundstone provides useful, and extremely entertaining, examples. (This is where the “How to Take Advantage of It” part of the title comes in.) Among these illustrations are the “free” 72-ounce steak, which he uses as a segue into supermarket pricing; $14,000 Ralph Lauren handbags, which leads into a discussion of two competing bread makers at Williams-Sonoma; and $100 hamburgers, which segues into a look at the Chili’s menu, with its stars, puzzles, plow horses, and dogs.

At the end of the book, you’ll have a much better understanding of the underlying economic psychology of retail and how many businesses set their prices. You’ll also be better positioned to set prices for your own business or evaluate those being offered to you.

I initially picked up Priceless simply because I liked Fortune’s Formula. My interest in pricing wasn’t that high, and I didn’t expect the book to have such depth and relevance to all areas of business and investing. I was also pleasantly surprised by its entertainment value—few books have given me a better mix of content and entertainment.

Priceless is definitely popular science, not a textbook. But the content is real, and the spoonful of sugar doesn’t make the medicine any less effective.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®