**Lollapalooza** >When you get two or three of these psychological principles operating together, then you really get irrationality on a tremendous scale. If two or more of psychological principles or misjudgments work in the same direction, you get a lollapalooza effect, “irrationality on a tremendous scale. ” What are some psychological principles that cause misjudgments? ***Selfinterest and incentives*** People do what they perceive is in their best interest and are biased by incentives.
Example 1: When the first dead Sea scrolls were discovered and the archeologists wanted more fragments of the scrolls to be found, they offered reward per fragment: The result: the fragments were split into smaller pieces before they were turned int. Example 2: The city of New Orleans introduced a program under which districts that showed improvement in crime statistics received awards that could lead to bonuses and promotions, while districts that didn’t faced cutbacks and firings. What happened? In one police district, nearly half of all serious crimes were reclassified as minor offences and never fully investigated.
**Liking*** Believing, trusting and agreeing with people we know and like. Includes bias from over-desire for liking and social acceptance and for avoiding social disapproval. Also bias from disliking – our tendency to avoid and disagree with people we don’t like. Example 1: Experiments show that attractive criminals are seen as less agressive and get a milder punishment than ugly criminals. Example 2: We like people who cooporate with us How do we get people to cooporate? Create and external common threat or an opportunity for a mutual gain.
The new-car salesman who takes our side and “does battle” with his boss to secure us a good deal. **Authority*** We tend to obey authority, especially when we are uncertain, supervised, or when people around us are doing the same. Example 1: In one study, 22 hospital nurses got a telephone call from an unknown physician and were ordered to administer an obvious overdose of an authorized drug. All but one nurse obeyed. Example 2: Airplanes crashing because officers were reluctant to disagree with with the authority pilots and bring important issues to their attention. ***Social proof*** Imitating the behavior of many others or similar others. Included crowd folly.
Example 1: Kitty Genovese was brutally murdered in 1964 in NYC. 38 people saw the incident. Nobody called police. A bystander to an emergency is unlikely to help when there are other people around. Example 2: Collective suicide of Jonestown. ***Reciprocity*** Repaying in kind what others have done for or to us like favors, concessions, information and attitudes. Example 1: A free sample tactic used by Amway Corporation. They leave their products for couple of days to try them out. You use little bit of each product and then you feel compelled to buy them because you used some.
Example 2: Hare Krishnas giving roses before they ask for a donation so that you feel compelled to repay in kind and donate money. ***Persian Messenger Syndrome*** We don’t like to deliver bad news. We try to distance ourselves from doing it. We tend to dislike people who tell us what we don’t want to hear even when they didn’t cause the bed news. This gives people an incentive to avoid giving bad news.
It is called Persian Messenger Syndrome because if a messenger delivered good news, he would be treated like a king, if a battle was lost, he would lose his head. **Self-serving tendencies and optimism*** We see ourselves and unique and special and we have optimistic views of ourselves. We overestimate the degree of control we have over events and underestimate chance. Example 1: Warren Buffett: >Any investor can chalk up large returns when stock soar, as they did in 1997, In a bull market, one must avoid the error of preening duck that quacks boastfully after a torrential rainstorm, thinking that is paddling skills have caused it to rise in the world. A right thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.
Example 2: “It worked because we made the right decisions. ” “It didn’t work because of a bad business climate. ” ***Deprival syndrome*** Strongly reacting when something we like and have is or threatens to be taken away or “lost. ” Example: What happens if you try to lower someone’s income? Charlie Munger: >(A) You’re facing deprival super-reaction syndrome – people just go bananas. And (B) the union representative has to bring his members the deprival message and endure the Pavlovian mere-association hatred that results.
Therefore, he won’t do it – largely for that reason. So you have two powerful psychological effects making it hell. All of those strikes in the late 1800s and the early 1900s where Pinkerton guards were shooting people were about takeaways. Arriving immigrants were willing to work cheap. And capitalist proprietors tried to reduce wages – sometimes because they felt they had to because their competitors were doing it and sometimes because they simply wanted to make more money. At any rate, all of that murder and mayhem was the result of deprival super-reaction syndrome plus the reality that nobody wanted to be the carrier of bad news. *** Reason-Respecting*** Complying with requests merely because we’ve been given a reason.
Example: In one experiment, a social psychologist asked people standing in line to use a copying machine if she could go in front of them, “Excuse me, I have 5 pages. May I use the Xerox machine because I have to make some copies? ” Nearly all agreed. Sometimes the word “because,” without a sensible reason, is all that matters. ***Consistency *** Being consistent with our prior commitments and ideas even when acting against our best interest or in the face of disconfirming evidence. Includes confirmation bias – looking for evidence that confirms our actions and beliefs and ignoring or distorting disconfirming evidence.
Example 1: *I don’t want to sell this declining stock and face a loss. I put $100,000 into this. I must prove to others and myself I made the right choice. * After we buy a stock, we are more confident it was a good buy than before the investment. We want to feel we did the right thing and keep our beliefs consistent with our actions. But nothing has changed. It is the same business before and after. Example #2: *John and his family decided to buy a new car. They chose a dealership that agreed to sell the car $1,000 below the competition. Then the salesman changed the terms. He had discovered an error.
In the end, the price ended up $200 above competition. In the low-ball technique, the salesperson gives the customer an incentive to enter into an agreement with the intention of changing the terms to the seller’s advantage (either by removing the advantage or adding something undesirable). John decided to buy the car. He drove the car, picked the color, the specifications etc. He is committed to the purchase. Instead of backing out of the deal, he found new reasons to justify his purchase of the car. Otherwise he would appear inconsistent. Low-ball is often used by politicians in elections.
So what if there is a real world situation where all of these psychological misjudgments work in the same direction? Board of Directors of corporations in the United States. Why do they make all these dumb decisions about acquisitions, CEO pay and other projects? Charles Munger: >The psychological nature of the board of directors system makes it an ideal system for causing people to follow the lead of the CEOs. Warren Buffett: >When people meet every couple of months and come from different parts of the country – and they have the normal social instincts – they don’t like to have rump meetings or sort of talk behind people’s backs.
So it’s very difficult in a group – particularly if it’s a group like Charlie described where the directors’ fees for a significant number of them are important to their well-being, and they’d love to be recommended for another board and add another $100,000 a year to their income O for someone to lead a charge all of a sudden at a regular meeting to try to arrange a rump meeting of some sort to say, “We think the at head of the table is no good. >So dealing with mediocrity – or, like I say, a notch above it – is a difficult problem if you’re a board member… >l’have been on 19 boards. And I’ve never seen a director on any of the 19, where the director’s fees were important to them, object to an acquisition proposal or a CEO’s compensation. Apart from **incentive-caused bias, liking and social approval,** what are some other tendencies that operate at board meetings? **Authority **- the CEO is the authority figure who directors tend to trust and obey.
He may also make it difficult for those who question him. **Social proof **- the CEO is doing dumb things but no one else is objecting so all directors collectively stay quite – silence equals consent; illusions of the group as invulnerable and group pressure (loyalty) may also contribute. **Reciprocity** – unwelcoming information is withheld since the CEO is raising the directors fees, giving them perks, taking them on trips and letting them sue the corporate jet. Association and **Persian Messenger
Syndrome** – a single director doesn’t want to be the carrier of bad news. **Self-serving tendencies and optimism** – feelings of confidence and optimism: many boards also select new directors who are much like themselves; that share similar ideological viewpoints. **Deprival **- directors don’t want to lose income and status. **Respecting reasons** no matter how illogical – the CEO gives them reasons. **Consistency** – directors want to be consistent with earlier decisions – dumb or not. No wonder we need Carl Icahns.