Gambling on En Bloc Sales

By TAN Kee Wee

(MediaCorp 938LIVE’s Money Talks, Thursday, 14 August 2008, 7.50 am and 7.20 pm)

Many investors of Laguna Park must be having sleepless nights. It’s not just the ugly clashes we read about. It’s the decision to sell or not.

The Singapore property market is sliding. If this trend continues, and if the Laguna Park investor sells his unit today, he would do well rather than to wait till next year.

If he wants a higher price than today’s price, he should wait for the en bloc sale. Let’s assume, for the sake of argument, that there is a chance that the en bloc sale can fail, and buyers will disappear after that. What should he do?

This is the dilemma that is giving him sleepless nights. This dilemma is studied in behavioral economics, which is a branch of economics incorporating psychology to study the markets.

What behavioral economics have found is that people don’t want to take a gamble when they expect to gain something. However, people are more willing to take a gamble when they have something to lose.

Let me explain these two scenarios with examples. In the first scenario, I offer you two choices. I can either write you a cheque for $1,000 now, or you can take a gamble of tossing a coin. If you win the toss, I will write you a cheque for not $1,000 but $2,000. But if you lose the toss, I will give you nothing. Will you take the gamble?

Nine out of ten times, you will not take the gamble. You would rather take $1,000 now rather gamble with the toss of a coin.

Your behavior reflects the Laguna Park investor. Let’s leave aside those sentimental owner-occupiers, who won’t sell at any price. If this investor can make a profit selling now, he will probably do that.

In the second scenario, instead of me writing the cheque, you will be the one writing the cheque. But you will still be the one to decide whether to take the gamble or not.

In this second scenario, I will offer you two choices again. You can either write a cheque for $1,000 to me, or you can take a gamble and toss the coin. If you win the toss, you give me nothing. But if you lose the toss, you must write me a cheque for not $1,000 but $2,000. Will you take the gamble?

Nine out of ten times, you will take the gamble and toss the coin. In other words, in this second scenario, you cannot accept the guaranteed loss of $1,000. You would rather gamble and hope to pay me nothing.

This aspect of behavioral economics explains many events, like why people suing investment banks for fraud usually accept a smaller lump sum payment rather than go for a trial. Or why rogue traders like Nick Leeson, when faced with a guaranteed loss situation in their trades, would take bigger bets.

Behavioral economics also makes us understand the mindset of athletes vying for glory in the Olympics. Cheating, and doping is one way about it, will forever be present because most athletes feel like they are in the guaranteed loss situation.

They feel like this because they have sacrificed their careers to compete. To them, the gold medal means glory and commercial endorsements. The silver and bronze medals are as good as nothing. So they gamble with illegal drugs hoping to escape detection and clinch honour.

Behavioral economics also tells us something about the reaction of another investor at Laguna Park. Here, his investment is under water. He is in the guaranteed loss situation. So he will take a gamble. He will push for the en bloc sale using fair or foul means.

So when en bloc sales turn ugly, we now know why. When money and the gold medal are at stake, civilized behaviour and fair play will take second and third places on the rostrum.