Sunday, March 21, 2010

Influence: Chapter 5

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.

We are more likely to buy a product when we like the seller. While this may be obvious, what is not so obvious is what makes us like a seller, as some of the factors that cause us to like are subconscious.

For example, people are more likely to like someone who is similar to them, across many dimensions: not only physically, but mentally as well (e.g. political affiliations, dress/fashion preferences etc.). This is why stock brokers are trained to look for clues about a person in order to engage in conversation that expresses a similarity with the potential buyer (e.g. "Where are you from? ...Oh my wife was born there!")

Attractive people also tend to be liked, and often this is on a subconscious level. Experiments have shown that attractive people can make a product (e.g a sports car, a stock) appear faster and more appealing to a group of subjects, even when the subjects swear afterwards that the appearance of an attractive person had no effect on their responses. Data shows that this subconscious liking leads to advantages for more attractive people that range from higher pay to shorter prison sentences.

Positive association also leads to liking something more. This is why marketers will associate their products to events people have positive feelings towards. After the moon-landing, many products were associated with rockets and outer-space even if there was no relevant link between space travel and the product. Today, advertisers are willing to pay big bucks for the right to associate with the Olympics or other sporting and concert events. In an interesting experiment, restaurant frequenters were found to tip more when the bill came in a tray with a "MasterCard" logo on it, even if the frequenters paid with cash! (However, only those with positive past associations with credit card companies were found to tip more, of course.)

Finally, the sharing of common goals and/or cooperation also leads to liking someone more. This is why salesmen will often pretend to be on your side while working against management to get you a good deal.

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