Stoic Investing

Human Misjudgment : Reciprocation

If you are sitting in a dark and unknown place for long time and someone switches on a light source, the initial feeling is of discomfort (especially for eyes). But once you get comfortable, you realize how different that place is from what you initially thought it to be.


In my college days, I had a similar feeling. My mind was in a mess and I was struggling to find some answers juggling myself between conflicts of religion, science, soft sciences etc.


As luck would have it, I stumbled upon the book of Richard Dawkins called The Selfish Gene


It was a magical feeling and the world was a different place for me after that.


It influenced my views, clarified a lot of things about evolutionary qualities of human beings and also made clear the reason for apparent illogical behaviors of various species in the world.


A very particular behavior which Dawkins explained in his book was that of ‘altruism’ and its central place in a gene-centered model as an activity that enhances the survival probability of a gene.


The idea was build upon the work of Robert Trivers who developed the theory of ‘Reciprocal Altruism’.


According to Wikipedia…


Reciprocal altruism is a behaviour whereby an organism acts in a manner that temporarily reduces its fitness while increasing another organism’s fitness, with the expectation that the other organism will act in a similar manner at a later time.


Further developing on the idea, Dawkins explained that due to evolution, various species show a strong tendency to reciprocate.


Humans also have an automatic tendency to reciprocate the actions of others (both favours and disfavours). To do otherwise, one has to train oneself as it is against the natural (evolutionary) reaction.


This tendency to reciprocate is so powerful that various cultures, religions, philosophies etc have formed an ethical code which is aptly called ‘Rule of reciprocity’.


A more popular version of this rule is also known as the “Golden Rule”. Wikipedia defines Golden rule as…


The Golden Rule or ethic of reciprocity is a maxim, ethical code, or morality that essentially states either of the following:

  • (Positive form of Golden Rule): One should treat others as one would like others to treat oneself.
  • (Negative form of Golden Rule): One should not treat others in ways that one would not like to be treated.


Sociologist Alvin Gouldner says that there is no human society on earth that does not follow the Rule of Reciprocity.


In their book, The Imperial Animal, Lionel Tiger and Robin Fox explain that we live in a “web of indebtedness”, which is a unique adaptive mechanism of human beings, allowing for the division of labor, the exchange of diverse forms of goods and the exchange of different services.


One often realizes the power of this tendency when one has to do a reciprocating act even if one does not wants to do it. It’s almost like an obligation.


For example, you have a higher probability to invite a person to your party even if you dislike the person, but just because he invited you to his party earlier.


Besides, the tendency works not only for equal exchanges but very uneven ones too. As we will see later, this has been and can be used well if understood properly.


As with all other psychological biases we have studied so far, a person who understands these biases well has a tremendous advantage and can gain a lot by using these biases for his benefit.


Of course, just like a knife which acts as a tool doesn’t decide its final use, this knowledge can be used for good or bad depending on the intentions of the person. Examples will be the best way to put across the point.


Sales people at various organizations are taught to use this tendency, knowingly or unknowingly.


When you go to purchase a car, the salesman offers you a nice place to sit and offers you cold drink or tea. These small favours are extremely powerful in tricking you later to add those extra accessories worth far more and you do it sometimes just to reciprocate the nice gesture of salesman.


Globally, Hare Krishna disciples use this technique very effectively by giving flowers to unwary travelers. They would give the flower as a gift and when the gift is accepted, the disciple would ask for a donation.


With the gift in your hand, it’s hard to refuse a smiling request for a small donation. (I am sure, living in a country with countless gods and so many disciples, almost everyone would certainly have their own ‘Hare Krishna’ type experiences) :-)


Another great success story based out of exploiting reciprocity is that of Amway.


It introduced the concept of ‘Bug’ Kits which contained free samples of their products and the distributors used to leave this kit with homeowners for three days, no questions asked.


After that, when the distributors came to collect the Bug Kit and also take possible orders, people were happy to reciprocate with a small or a big purchase.


I referred to Robert Cialdini’s book in my previous article. Reciprocity is also one of the six principle explained in his book on persuasion. With the help of an experiment, he beautifully displays this principle.


In his experiment, he took a random group of people and asked for a small request – “Would you agree to supervise a bunch of juvenile delinquents on a day trip to the zoo?”


17% of the respondents agreed to do it.


Then he changed his method and did the following. He first asked for a very big favor – “Would you be a big brother or a big sister to one of the kids at the juvenile delinquents’ detention center? This would require three hours of your time, every week for the next two years?”


It was a huge commitment and none of the responders agreed for the same.


He then asked, “Well if you can’t do that, then would you agree to supervise a bunch of juvenile delinquents on a day trip to the zoo?”


Surprisingly, 50% agreed to this request compared to 17% earlier.


In this case, the respondents reciprocate for the ‘concession’ given by the requester, by providing a small ‘concession’ from their end too. Amazing indeed!


For the interested ones, this technique is also known as ‘Door in the face technique’ and ‘rejection-then-retreat’ technique.


It becomes particularly easy to use this technique when the person receiving the favour is not the one who is actually paying for it in return, but is just an agent.


For example, various government officials receive favours from influential businessmen and then are happy to return the favour, since it’s not their own money but that of government. (Indirectly, citizen’s money)


Brokers give gifts and occasional favours to their clients to create a forceful psychological obligation for the client to oblige in form of huge sum of commissions.


The examples are far and many. There are few antidotes which are essential and have been effectively used.


At an individual level, the best antidote is the mere awareness of this bias and having personal rules to avoid this bias getting affect you.


The most effective way is of course the obvious one: Don’t accept such favours.


It’s not rude and it can save you from a lot of psychological guilt feeling.


At an organizational level, it is imperative to have explicit policies against receiving gifts and favour or at least restricting the amount. A lot of corporates have realized this and have a stringent limit on gifts.


Sam Walton realized this long time back and he didn’t imposed limits; he absolutely prohibited any gift acceptance from any vendor, not even a handkerchief. (Popularly known as Sam Walton’s handkerchief rule)


Once you know how not to become a victim, you can go one step forward and use this at your advantage (for good, of course), like what is done for charities funding. A lot of charities, when mailing for donations requests, also send a small gift along with the request. This has proven to be a very effective technique.


As the smart investors and readers of this article would have figured out and would also have experienced in past, there are certain obvious benefits of reciprocity in investing profession. The first and very apparent one is of investing ideas.


A lot of investing ideas are usually a result of reciprocation. You share your best ideas with people and you will find the other investors doing the same with you. It have been of great help to me (No shame in admitting it, there is limited time and lot of ideas).


Besides ideas, reciprocity have also helped me improve my investment framework leaps and bounds just because I was willing to discuss it with more experienced people who reciprocated by discussing theirs and which saved me a lot of time and mental exhaustion.


In my observation, during individual interactions reciprocity often enhances the vicarious learning process.


A very different way in which I have seen people using this principle might interest you. A very prominent macro based investor likes to expand the reciprocity principle in the context of ‘Moral Hedging’ or in other words taking bets for profits on evil or sinister corporations.


Another interpretation I have observed is that of ‘not to’ provide capital to corporations that harm environment as it comes back to you in direct ways. Here we jump to the boundaries of other issues besides just reciprocity and I leave the exploration of these ideas to the readers and what they can learn from them.


Or else, we can learn from Mohnish Pabrai, who used this in a very subtle way. When requesting for money for his fund, he mailed a beautiful expensive pen along with the request letter. We all know how that ended. :-)


So learn from this ‘Reciprocity’ tendency. Help others as much as you can. Be generous and give whatever you can. (If you are feeling generous and have a great stock idea, my email id is given at the end of the article. Don’t hesitate!) :-)


And when on the receiving end of certain hostility, train yourself to defer reaction. As Charlie spoke quoting his friend Tom Murphy, “You can always tell the man off tomorrow, if it is such a good idea.”


In the end, I would leave you with some powerful lines by a great thinker of his time, which also highlights how this principle have been known and used for long times.


“Zi Gong asked, “Is there one word that may serve as a rule of practice for all one’s life?” The Master said, “Is not RECIPROCITY such a word?” – Confucius

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