Sunday, March 14, 2010

Influence: Chapter 3

Value investors believe that Mr. Market's mood swings offer them excellent opportunities to buy low and sell high. But how does an investor avoid becoming Mr. Market rather than taking advantage of him? Influence, by Robert Cialdini, helps us understand the factors that influence us, which are exploited by, among others, the news media, our brokers, and research analysts, and thereby puts us in a position to protect ourselves from our own, hard-coded biases that we wouldn't otherwise know have been triggered.

People have a need to act in a manner consistent with their beliefs, values, and prior commitments. This automatic behaviour serves a useful purpose: consistent conduct reduces the need to repeat the processing of information when an individual is faced with similar situations. Consistency provides a beneficial approach to daily life and is a trait that is valued by society.

However, this behaviour can also be exploited by others. Exploiters first seek to get individuals to take stands on issues. They will then use those "commitments" to elicit the behaviour that they seek. For example, home owners are much more likely to agree to having large "DRIVE CAREFULLY" signs on their lawns if a few weeks earlier they agreed that safe driving is desirable. The initial commitments lead to consistent behaviour most when they are active, public (e.g. a petition), require effort (e.g. a fraternity hazing ritual), and are viewed as internally motivated.

This need to be consistent can even "grow legs", as when people take a stand on a position, they tend to incorporate new information only if it strengthens their original position. This results in salesman tactics that offer more than they intend to give. In this manner, such tactics are based on the idea that once the buyer has decided that he wants the product/service, he will create more reasons to like the product, such that the initial offer can be reduced and the buyer will still be interested.

Recognizing that such exploitation is taking place is the best means by which to avoid falling prey to this automatic behavioural response. However, because people will often come up with justifications to proceed with certain courses of action, their line of thinking must be proactive to avoid being exploited. As such, Cialdini suggests that readers ask themselves this question when faced with a situation where one feels compelled to do something against one's wishes: "Knowing what I now know, if I could go back in time, would I make the same commitment?"

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