We all like to think of ourselves as wise, rational decision-makers, immune to the foibles and biases of others, but even behavioural psychologists cannot prevent short cut thinking, says Adrian Furnham
One of the most approachable, important and well-researched books on influence, negotiation and persuasion was written by Robert Cialdini, and is called Influence: The Psychology of Persuasion. It has sold over 3 million copies and been translated into more than 30 languages.
Cialdini worked for 35 years to come up with strong evidence-based findings about which persuasive techniques work.
In this book he suggests there are six, and only six, distinct ways to influence people.
Reciprocity: People feel obliged to give back/return to others a behaviour, gift, or service that they have received. People repay in kind, so give what you want to receive. Hence “there is no such thing as a free lunch”.
Scarcity: People usually want more of those things they can have less of. Scarcity means “valuable” so highlight “uniqueness” and “exclusivity”. So think “closing down sale” or “limited edition”.
Authority: People follow the lead of credible, knowledgeable experts. People defer to experts so those who wish to demonstrate authority will emphasise expertise and qualifications. Hence the advertisements using doctors, dentists and award-wining athletes to push a product.
Consistency: People feel the need to be consistent with the things they have previously said or done. People align with their clear commitments. Hence the fact that politicians will never answer the question lest they have to be consistent with the answer.
Liking: People prefer to say yes to those that they like and those whom they like. People like those like them, so uncover similarities and be very positive to people. It is called homophilly…. the love of those who are the same to you.
Social Proof/Consensus: People will look to the actions and behaviours of others to determine their own. People follow the lead of others so use peer pressure.
Think how restaurants use each of these techniques. They always sit early or smart customers near the window (social proof). Waiters are taught to ask if everything is to your satisfaction to hear you respond affirmatively (commitment and consistency). You may be offered a “free” amuse-bouche and chocolates accompany the bill (reciprocity). Staff are encouraged to “befriend” the customers (liking) and explain which dishes are few in number because of popularity (scarcity). Many show pictures of famous clients or favourable reviews or stars rating (authority).
So, knowing about and indeed teaching all this stuff, am I personally immune? Alas not. To illustrate this: I was in Brazil and the length of time I was away necessitated me buying my wife some jewellery. So, during a break in the conference I found and wandered into small jewellery store.
I was soon attended by a charming, English-fluent sales person. “Ah”, he said “we are in Brazil so can I offer you a fine cup of coffee?” (reciprocity). “Where are you from?” he enquired. When I answered London he noted “the best city in the world: my brother lives there” (liking). “We have some very famous clients in London” he continued, and mentioned two names I had not heard of. “We have a new website where they find us” (social proof)
I then pointed to a particular piece: “Yes” he exclaimed “that is my favourite, and designed by the top jeweller in Brazil” (authority and liking). “And sir” he continued “that beautiful green stone, like an emerald, but more valuable and beautiful, comes from a mine 200 km from here. It is the only place where this jewel is found…and it is running out” (scarcity).
“Who is the jewel for?” he enquired, “and does she loves beautiful things?” “My wife” I replied, “and yes she does”. (commitment)
And yes, after a little haggling I bought it, having watched this expert in action! I knew exactly what he was doing but I did I fall for his techniques, or simply observe them?
And you might be asking how this applies to behavioural economics. The answer is, many consultant, experts and “gurus” slip into the conversation the words “nudge” and “bias” and “System 1 thinking”. Many can, if required, describe and explain these, such as:
1. Loss aversion: This is the tendency to prefer avoiding losses to acquiring gains. All of us treat losses and gains quite differently. People’s decisions are powerfully influenced by how they frame and describe situations. Nearly everyone is much more willing to take risks to avoid losses and much more conservative when it comes to opportunities for gain. This is a very common bias and, since it can demonstrate a short-termist attitude, we believe this can point to a lack of investment conviction.
2. Confirmation bias: This means that one will favour information that confirms previously existing beliefs or biases. This bias impacts how one gathers information as well as how it is collated, analysed, interpreted and recalled. This bias is particularly prevalent in portfolio managers, who might instruct their analysts to seek only a particular type of information (e.g. the recent movement in the share-price and other financial metrics or the change in senior personnel) and overlook, either consciously or subconsciously, information that might conflict with their investment thesis.
3. Endowment: This is the idea that people have the tendency to overvalue things (including the investment) they own. They place a higher value on assets that they personally own than the actual, sometimes even printed, market value. These assets seem endowed with extra, but incorrect value. This in part explains why people hold poor investments for too long and thus replace convictions with irrational behaviours.
4. Anchoring: This is the impact of an arbitrary reference point upon an estimate of an unknown value. The related heuristic bias is caused by people having insufficient adjustment in decisions because final judgements (for example, agreeing the price) are assimilated towards the starting point of the judge’s deliberations. This often occurs because all decisions are anchored to the buying price of the stock rather than its current value.
They can observe over-confidence and herding in “lesser beings” and they can do a convincing mini-lecture on the topic. It can give the impression that being wise to all these “short-cuts” to clearly thinking they are immune to it.
But is a knowledge of nudging and bias enough to prevent unwise short-cut thinking? Are those who have read books on behavioural economics become better decision-makers? Possibly. But it is likely only to occur if they have warning systems and other strategies for them to stop and confront their decision making. Do they appoint “observers” or “devil’s advocates” to make one reflect on one’s decision making?
The wise have strategies to reduce biases: they prepare and plan and pre-commit to decisions; they log and monitor all their decisions and their consequences; where possible they employ a devil’s advocate to regularly challenge them, and they always try for a cooling off period. All these are ways to regulate extremes of emotion on decision making.
We all like to think of ourselves as wise, rational decision-makers, immune to the foibles and biases of others. Some think speaking “behavioural finance” is a sort of talisman against all that hot, short-cut, psycho-logical thinking. Chance would be a fine thing!
Adrian Furnham is the principal behavioural psychologist at Stamford Associates in London, and author of several books on behavioural psychology.