Piaget

I was reminded earlier today of my comment from a couple of days ago that "low-priced" was a relative term. The future Mrs C commented that an estimate was value because "it was lower than others". As I am prone to do, I launched into a detailed betting related explanation of why, logically, the fact that A was better value than B did not mean that A was actually value. Her eyes soon glazed over and she retreated to the kitchen for another cup of coffee, while I tried to remember the name of the experiment which showed that kids, when presented with two beakers of water, always picked the taller one as containing more, even when shown that both beakers were exactly the same.

I found the details. Courtesy of the excellent, but sadly now inactive, TraderPsychology blog.

This illustration (see above) shows a famous experiment performed by the Swiss Philosopher and Child Developmental Psychologist, Jean Piaget. In the 1950s, he performed his famous Conservation experiment. Here, two equal amounts of water are presented to a child. Then, the contents of one glass is poured into a tall, thin glass. The child is asked which glass holds more water. If the child is five-years old or less, it will typically point to the taller glass.. It will do this consistently, even as you pour the water back and forth to demonstrate that it is absolutely equal. Here, the child is basing its judgment solely on the height of the water in the glass.

I've had this discussion with people about share prices. To the novice, all share prices are viewed as equal, and a share available for 40p must be better value than a share in another company available for 90p. While this may be true, the logic is clearly false. I suspect that many investors on the betting exchanges make a similar error when they see a price of 1.1 and think it's low. It might well be low, but it could well also be value to back, i.e. relatively high.

Not to open up the old debate on value at odds-on again, well, maybe a little, but 2.0 (evens) can, just like any other price, be low or high. As Piaget's experiment shows, there are other factors than the number (height) itself that need to be considered before forming an opinion.