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Value Investing: Tools and Techniques for Intelligent Investment by James Montier

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Chapter 9. Placebos, Booze and Glamour Stocks[9]

  • It appears we are preprogrammed to equate price and quality. Now, in many contexts this may well be a useful heuristic. However, like most mental short cuts it can lead us far astray from rational decision making.

  • For instance, which will work better: a painkiller that costs $2.50 per dose, or the same painkiller discounted and selling at just 10 cents? Rationally, they should have exactly the same effect (especially since both pills are nothing more than sugar pills). However, Dan Ariely and colleagues have found that people report the expensive version to be far more effective than the cheap version!

  • If you prefer booze to pills, then consider the following. You are given some wine to taste and told it costs $10 a bottle, and then some more wine to taste and told it costs $90. The $90 wine was rated nearly twice as nice as the $10 wine. The only snag was that the ...

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