Assignment: Behavioral Biases in the Movie 'IPO of Golgappa Business'

Dhiraj Rai, Roll 22521

A Brief Review of the Movie clip

The setting is the Indian stock market of the 1990s when unscrupulous promoters were launching
IPOs and disappearing with investors’ money. This short movie portrays the entire process of IPO
sales, scams, and unethical practices that prevailed during the stock market boom. Jaspal Bhatti,
the main protagonist of the movie is shown as a chartered accountant who suggests a street food
vendor, golgappa seller to launch an IPO for his business, in the name of a fictitious company, PP
Waterballs.

The movie masterfully portrays investors' psychology driven by greed, optimism and
overconfidence; inefficiency in the market; pathetic condition of legal and technical efficiency.
Full of funny dialogues and cleverly twisting plots, the episode highlights the deceptive tactics
employed by Bhatti and his stockbroker to inflate stock prices, leaving the small investors empty-
handed. It highlights the role of marketing stunts, expert opinions, and analyst reports that often
exaggerate companies’ performance to shape investors’ psychology.

Behavioral Biases Captured by the Movie

Based on the movie, we explore the following behavioral biases shown by investors which had led
them to buy overpriced stocks, experience share price bubbles and bursts, and reduced returns.

▪ Overconfidence bias: Jaspal Bhatti and other analysts exaggerated the future prospects of
the company to create a positive perception of the IPOs. These rosy projections and long-
term forecasts led investors to overestimate the potential returns while ignoring the risks
involved.
▪ Representativeness bias: In the movie, the company is projected as a foreign company
incorporated with the English name PP Waterballs (Prem Prakash in short form) which is
collaborating with London-based company 'Red Lion of London (Lal Singh in English)
that has 80% export units. Investors thus wrongly conclude that this is a very good
company.

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▪ Framing bias: Bhatti wrote and circulated such a report about the business of golgappas
that people thought it was a big international food chain business. The context was
presented very favorably and framed the company as a reputed global company. Investors
compare and find the company's IPO the most attractive one.
▪ Availability bias: The promotional campaign and marketing of IPO came in local
newspaper which was correctly targeted to retail investors. In every nook and corner,
people gossip about PP Waterballs IPO. Investors base their decision on which information
were easily available.
▪ Herd mentality bias: The movie shows the tendency of investors to follow the crowd and
invest in IPOs based on marketing stunts and recommendations from analysts. Investors'
actions and reactions are markedly driven by the fear of mission out (FOMO) mentality
and the belief that others must correctly know something they don't.
▪ Confirmation bias: The movie portrays that analysts and experts tend to focus on the
positive aspects of the IPOs. They selectively present information that supports stock's
bullish outlook. Investors tended to interpret the initial price rise as confirmation of their
beliefs. This bias prevented investors from critically evaluating the risks and making well-
informed decisions.
▪ Regret-aversion bias: People don't want to miss out on investing in PP Waterballs IPO. If
they missed it, they think they would have to be regretting later.
▪ Anchoring bias: Investors thought that the stock price soon exceeds the current price of Rs
45. They revised and adjusted it to exceed even Rs 100. The reference price was about Rs
10 and then revised to Rs 22 subsequently. They value the stock with different anchors by
analyzing each option on their own.
▪ Loss aversion: The movie shows how investors tended to hold on to losing shares in the
hope of recovering losses, even when the fundamentals deteriorate. As a result, most
investors ended with the losing stocks. Due to loss aversion bias, investors landed up 'riding
losers and selling winners'.
▪ Endowment bias: When the stock price started falling, a grumpy old man emotionally
claimed how he could sell the share at this low price while he had bought the shares at a
premium. He thought the shares he is owing are still more valuable. Irrationally, he valued
his owned objects higher than the market value.

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 ▪ Self-attribution bias. At the end of the movie, people vandalize and thrashes their expert,
Prasad Saheb for not letting them know in advance about the matters of business and
making them aware of its existence. Investors attribute success to their own skills and
failure to outsiders and other forces.

Some Events, Market Manipulation, and the EMH

What if the stock market portrayed in the movie was efficient enough in any form? Bhatti and his
brokers had significant control over the supply and therefore, created an artificial shortage. They
held shares until the price increased to Rs 100. After gaining a higher price level, they offloaded
all their shares and then exit the market.

Here the share price is influenced by very few players’ activities, particularly of Bhatti and his
brokers. They were 'pumping and dumping' shares of PP Waterballs and reaping huge profits and
losing to retail investors. This signifies that the market is not efficient.

The market failed to accurately process and disseminate information and then adjust prices
accordingly which suggests the market deviated from the EMH.

Particularly, the market has two shortcomings regarding efficiency in the market:

▪ Legal efficiency: The market is operating under a very lax regulatory regime. Regulators
allowed dishonest promoters to sell IPOs, collect money from investors, and then
disappear. Bhatti was invariably cornering shares and manipulating the market price. The
regulatory framework is inadequate to prevent such fraudulent practices. The movie films
how easy it's for anyone, even a golgappa seller, to incorporate a public company and
swindle funds from the public.
▪ Technical efficiency: The prospectus of the IPO was published in a newspaper and people
came to perceive the company as an investment-grade company. Bhatti documented
everything in the report in a very cosmetic way by using Xcell spreadsheets. The trading
platform was such that 'buy and sell' orders were placed by telephone. The market looked
operating in a manual order system. As a result, a handful of investors primarily influenced
the market price. Noise traders were dominant over retail investors. Jaspal Bhatti and his
broker successfully acquire enough shares from the market where the trading approach was
the ‘open outcry’.