Watching Out For New Records
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 18 October
2007, 7.45 am and 7.20 pm)
In April this year, a 1950s Omega platinum watch was
auctioned off for US $351,000. It was the highest price ever
paid for a brand that is well-known for selling mass-produced
Newspapers publicized the record price fetched at the
auction in Geneva. Omega publicly claimed that a "Swiss buyer"
bought it. What Omega did not mention was that the “Swiss
buyer” was none other than itself.
It took a while before the public found out about
this. What we now know is that there was a tie-up between Omega
and a Geneva auction house by the name of Antiquorum
Basically, Antiquorum organized the public auction of
Omega watches. And Omega would step in to bid anonymously if
they wanted prices to go up to a certain level.
As more details of the auction surfaced, it turned out
that Omega was not the only watchmaker with such an
arrangement. Many famous Swiss watchmakers also had such an
arrangement with the auction house.
Such price fixing is known to most of us. But unknown to
most of us, the publicity given to such record prices has a
powerful influence on the behavior of subsequent buyers.
In economics, we call this type of behaviour “informational
cascade”. It is a situation in which a person would copy the
action of the person before him, even if that action goes
against his private belief.
Let me illustrate. In the popular gameshow “Who Wants
To Be A Millionaire?”, the majority of the studio audience
usually knows and votes for the right answer. But suppose,
instead of the audience voting silently together, they voted
out loud, one after another. Let’s suppose the first person
gets it wrong.
If the second person isn’t sure of the answer, he’s
likely to go along with the first person’s wrong answer. For
the third person, he’s also likely to go along with the wrong
answer because he assumes that the first two persons know more
than he does.
Thus begins this cascading effect. Because of this, a
group is prone to reach mistaken conclusions even when most
people in the group start out knowing better.
Studies have shown that even if 60% of a group knows the
right answer, there is a one-in-three chance that the group
will cascade into a wrong answer.
Informational cascade happens in financial markets
where it can feed excessive price speculation. For instance, a
person will not pay $3,000 per square foot for a HDB apartment
in Sengkang as he may consider it too expensive. But once
someone else has bought it at this price, he would buy
This cascading effect is also commonly found in
medicine. Doctors like to take their cues from other doctors,
leading them to over-diagnose certain illnesses, and
over-prescribe certain treatments.
A good salesman, like our Geneva auction house, knows
how to use this cascading effect to make money. Of course, it
can also be used to destroy. In Nazi Germany, it was used
against the Jews. We are all equally guilty of using it. We use
it to stereo-type people from other religions, countries and
The question is: Why are we so vulnerable? The simple
answer could be that most of us are unable to keep up with the
rapid flow of information coming at us.
So we look for guidance from someone who we think
knows better. This might well serve us most of the time. But
once in a while, we will blindly follow the wrong choice and