The Ambiguity Effect
When you’re considering two watches, which one would an average buyer be more likely to buy:
A watch made by a ‘traditional’ company or household name with global recognition, and an average global user rating of 4 stars out of 5 or A watch made by a largely unknown watchmaker whose name you have never heard mentioned outside the four walls of your local Redbar gathering - but rated 5 stars out of 5 by every collector you meet (admittedly a much smaller sample)?
That’s a loaded question, because I suspect that the average reader of my posts would possibly lean towards the unknown watchmaker in the wake of the recent boom in the independent watchmaking scene. That said, if such a question was posed to a sample of representative watch buyers globally, they would lean towards the household name.
This is just the nature of the luxury industry after all. If something lacks the ability to signal, then is it even luxury at all? How else does Rolex maintain such a large percentage of their market share? I wrote two other posts about this:
Anyway, the ambiguity effect is a cognitive bias where decision making is affected by a lack of information, or… "ambiguity". In this case, most watch buyers would rather buy the above average ‘known' entity’ than take a chance on a hidden gem. The issue here, is that the lesser known watchmaker lacks a track record, and leads buyers to play it safe.
Many of the stories I hear from collectors about their decision making processes, seem to confuse two related but distinct concepts:
Risk aversion: this is when collectors know the probability of gains/losses with both options, and then choose the option with higher odds of success but comparably lower ‘payout’. This might be like comparing a Rolex Submariner with a Limited edition Omega 007 Seamaster.
Ambiguity effect: here, collectors only really ‘know’ the probability of gains/losses with one option (the Rolex or Omega), and then they choose this option on the basis that they have no idea about the other one.
The obvious difference is the lack of data and understanding, which leads to the ambiguity effect. Incidentally, this paper in the Journal of Financial Economics states:
“We find that ambiguity shocks cause investors to decrease their exposure to the security market by trading out of stocks and similarly risky assets.”
So when things get uncertain, investors reduce exposure to that uncertainty. Same thing with watches, right?
Here’s another paper from the Journal of Banking and Finance which states:
“Our results confirm this hypothesis, as we show that, controlling for other factors that affect flows, increases in ambiguity are associated with outflows from equity funds.”
Another way of thinking about it is from the perspective of insurance. The entire reason for the existence of the insurance industry is: ambiguity. We do not know how the future will unfold, and so we pay insurance companies to take on these risks, and they pay actuaries to calculate the probability of a loss using pooling to help them ensure they make money over time.
The same applies to watches, in that we might not be able to quantify the value in a brand per se, but we can use the known data to draw conclusions about the probability of loss in buying a ‘liquid asset’ like Rolex, versus buying a watch from a similar-priced German independent brand like Felipe Pikulik or Czech brand like Ondřej Berkus. The Rolex is like an insured watch purchase in this analogy.
What is my point?
Well, all of the above was perhaps in stark contrast a few years ago, and more recently, independent watchmakers are becoming less ‘unknown’ and are therefore perceived as lower risk.
In addition to the large auctions celebrating independent watchmakers, there are also a lot of new watch dealers and resellers who are creating liquidity in the indie market, and this is a large part of what makes the market appear less risky. There’s nothing worse than holding a fairly valuable asset and having no buyers for it, and also no reasonable way of finding buyers for it - it might as well be worthless! This is basically what it was like 5 years ago with Journe, when you could pick up a brass resonance for under £50k - the same watches are now difficult to find, and are trading north of £300k.
All that being said, the most important point here is to start by being aware that your brain prefers KNOWN OUTCOMES! In other words, you have to first acknowledge the existence of the ambiguity effect, before you can prevent it from dominating your own decision-making.
This paper from the Journal of Behavioural Decision Making found that experience is an effective way to reduce the ambiguity effect. Basically, as people made risky bets with unknown probabilities, they became more comfortable in their decision making with all ambiguous outcomes.
As a watch collector, this translates into a classic chicken-and-egg problem: You will be a victim of the ambiguity effect less often, only if you embrace ambiguity more often - but you will not be keen to do so, because of the ambiguity effect! Lol!
The best advice is to do more research, and stop making decisions between two or more watches without actually studying the options in sufficient detail. Go out and visit the watch factories when you can, try and get to the bottom of claims regarding ‘in-house’ calibers and convince yourself that you actually care about a movement being entirely in-house, for example (incidentally, I don’t!). Do you really care about finishing? How much? Do you understand what an interior angle is, and what a ‘good example’ looks like? Is the ‘value’ in a watch movement’s finishing actually valuable to you, or have you simply decided that because everyone on Instagram has declared something to be the generally agreed opinion, you also subscribe to the same BS?
Knowledge is power. Now that indies are generally ‘de-risked’, the onus is on you to understand your options and make better decisions, instead of following the herd. Sure, taking that first step into the unknown might seem daunting at first, but with time and experience you will grow more comfortable embracing the uncertainties (as studies have shown).
Who knows, you might eventually discover the next Journe ;)
An insightful article with useful suggestions! Another possible approach is to consider the established brands as a group by themselves and independent or new brands in another group. In my case, for the established brands, after owning Patek, AP and Rolex, my next target is Chopard, which has long history but is underrated. For the small brands, after owning a few pieces, my sights are set on Moritz Grossmann and Fears. The buy or pass decision is easier if a candidates is considered within its own group. We are often after different things for different groups. For big brands, iconic designs, history and value retention. For new brands, innovations and cool features, such as the pusher below the crown to start the movement by Moritz Grossmann. Thanks again for the great article!
Thanks for the post. A really interesting way to look at watch buying.
A while ago I was going through a similar thought process - to buy an established brand or to buy a Habring. I really liked the Habring but worried about the tradable value over time.
In the end I went for it and my reasoning, within your framework was that I couldn’t see myself selling it and therefore I was like a buyer of bonds who is unconcerned about the fluctuations in price because they are happy with the coupons and will hold to maturity.