Stoic Investing

Human Misjudgment : Love and Hate

By the time you read this article, the world’s largest economy would have decided its President for the next 4 years.

 

There is always an excitement in the markets worldwide when it comes to the US election and especially this time, given the state of the US and world economy. The parties have left no stones unturned and the gravity of the election is obvious from the fact that the current campaign was the most expensive ever.

 

I personally find the US election campaigns very interesting and there are great marketing and economic lessons to be learned from them.

 

Even though the tactics and key agenda points differ according to the time and the state of economy, there is always one common element to all such campaigns.

 

The campaigns try to channel and exploit two of the most primitive emotions of human beings. In fact, these emotions have been the central drivers of most of the historical movements, be it the mythological Mahabharata, the ancient wars, the Nazi camps, or various freedom revolutions over the course of history.

 

Those two emotions are – love and hate – and these are the topic of today’s discussion.

 

Charlie Munger in his speech warned us about the biases caused by these two human emotions.

 

As human beings, it’s natural for us to like and love certain people and simultaneously we want to be liked and loved by others. Along with this natural instinct to like people, there is also a natural tendency to hate people we don’t like.

 

In the absence of any unusual stimuli, most of the people tend to agree with everything proposed by the people they like and love and tend to ignore their faults while doing just the opposite to the people they hate. Hence, at most times, these two human tendencies affect rational thought process and impede independent judgment.

 

According to Munger…

 

Liking tendency acts as a conditioning device that makes the liker or lover tend:

  1. To ignore the faults of, and comply with the wishes of, the object of his affection;
  2. To favor people, products, and actions merely associated with the object of his affection (Influence from Mere Association Tendency); and
  3. To distort other facts to facilitate love.

 

Just as liking and loving make humans agree with each other despite their vices, the tendency to hate or dislike does the absolute reverse and leads to ignoring or refuting the person we dislike or hate despite the virtues.

 

Here is what Munger has to say for that:

 

Disliking/hating tendency also acts as a conditioning device that makes the disliker/hater tend to:

  1. Ignore virtues in the objects of dislike,
  2. Dislike people, products and actions merely associated with the objects of his dislike, and
  3. Distort other facts to facilitate hatred

 

This phenomenon, due to its ability to influence people, has hence been highly exploited.

 

Since it is extremely profitable, there is a huge demand of people who can persuade other people to take desired actions and some people have a natural flair for it. There are numerous examples of war marshalls, CEOs, sports managers etc.

 

Luckily, for us lesser mortals (no offence to any reader, I am just speaking for myself here), Robert Cialdini, the Professor of Marketing at Arizona State University, explored the characteristics of such charismatic personalities and their methods of influencing, and wrote a brilliant primer on the techniques of influencing people and making them say ‘YES’.

 

In fact, Munger has recommended Cialdini’s book highly.

 

In his book, Cialdini has discussed six major psychological tendencies that are used/exploited by compliance enforcers to influence people’s responses.

 

One of the six major factors he discussed was the same which Munger is referring to here: Liking.

 

Marketers/Compliance enforcers have, for numerous years, used various techniques to increase the ‘likeliness quotient’. Some of the more prominent ones are:

 

 

  • Associations/ Similarity: Corporations usually push their products by hiring sales people from local communities because it increases the likelihood of people to buy from people they know and feel connected with. Unfortunately, this has also been the same technique exploited by fraud companies that run Ponzi schemes to expand their ‘chains’ or ‘tree networks’.
  • Attractiveness: Impeccable dressing and attractive appearances make people like others and generally tend to extend their liking to traits beyond appearances like intelligence, knowledge etc. Of course there is no direct correlation here.
  • Praise: Praising people for their work or their personal traits (especially in public) is also a very strong influencing technique. Even though excess flattery can be detected and is usually annoying, genuine praise often increases the likelihood of reciprocation in other forms.

 

Let us understand some of the consequences of these tendencies. Just like for any other psychological bias, once one is aware of the above consequences, one can mostly protect himself and occasionally benefit from exploiting the same.

  1. Investment Process: Almost every investor has some ‘all time favourites’. All time favourite stocks, all time favorite investors, all time favourite managements etc. This is fine till the point it clouds their judgment about all those favourites. I hear so many people bullish on a stock because the management has said something extremely good for the future of the business, Even though it’s OK to believe a management specially in a complex industry or an industry we aren’t too well aware of, especially if the management is considered shareholder friendly and has no reason to be doubted, it’s imprudent to blindly believe in it just because you cherish and admire the management of the company; and it is worse to bet big on it without proper research.
    It’s equally unwise to buy a stock just because one’s favourite investor thinks it’s a good bet. There are hundreds of people tracking what Rakesh Jhujhunwala or other ‘favourite’ investors are buying next. That’s why we also see the stocks run up immediately after their positions are known in the markets. But people forget to take into account their risk appetite, purpose of buying etc. Is it prudent for a retail investor to bet 15-20% of his smaller portfolio on something which Rakesh may just buy as a punter play (speculative bet) with a very small portfolio allocation (or even a large one)?
    The same is true for a particular stock. Past good experience leads some investors to have some kind of a love/hate relationship with some stocks. We all understand how unwise that is. The legendary investor Peter Lynch (and fictional character Gordon Gekko) reminds us not to fall in love/get emotional with a stock. The stock doesn’t know that we own it, so falling in love with it only makes us susceptible to bad judgment. I wrote about this some time back.
    The antidote here is quite obvious, isn’t it? Separate the idea and the person. Remove your association/affection and put it in a black box for some time and evaluate your ideas and options objectively. It’s usually tough for most people to do but it is absolutely essential.
  2. Social interactions: People often befriend and support people they like. These social interactions also open other opportunities and avenues for people who are liked in a social setup. On the other hand, even a kind act by an otherwise hated person is considered to be either an aberration or something driven by a selfish motive.
    We all can use this understanding to develop and foster healthy relationships in society. In his influential work “How to Win Friends and Influence People”, Dale Carnegie laid out in detail various techniques and habits which can guide one to be liked by society. We can develop bonds with people with common interests and can make friends by being supportive and encouraging, and complementing people on their achievements. The idea here is not undeserved flattery but genuine admiration.
  3. Other group activities: Coming back to election campaign discussion, it’s a common practice to channel hatred of the masses towards the opposition candidate by exploiting his past activities or ethnicity or any other trait that can be considered undesirable by masses ( unfortunately for Mitt Romney, even ‘Too much wealth’ falls in that last category )
    During a nationwide random enquiry on people’s views on the two candidates, statements that were heard included:

    • “I don’t think I am comfortable with him.” (This was a person’s view on Obama. Note that this person has no idea about his policies; and he is not uncomfortable with his policies, but him).
    • “He will run this country like he ran his business and will make a profit for himself.” (No prizes for guessing who this person is talking about).

    Both the statements are guided only by liking or disliking of the candidate and have nothing to do with their abilities or disabilities to be a good President.
    Religious extremism has found and has successfully channelled hatred of people for its own benefits. We have seen this over and over again: in corporate offices, where a liked person will always be preferred over a disliked but otherwise competent person for a particular group task; or a liked player (but slightly less talented player) chosen over a disliked one in the Indian cricket team (everybody knows who is being discussed here :-))
    Luckily for us, when it came to making of a team to venture on a ‘dream within a dream within a dream’, Cobb (Leonardo Di Caprio) was more sensible and sorted out the feeling of dislike between Arthur (Joseph Gordon Levitt) and Eames (Tom Hardy). Otherwise, Inception would probably have been impossible.

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