How to avoid weapons of influence in investing ?
Robert B Cialdini’s Influence: The psychology of persuasion is a must read for any budding investor and thinker. In this best seller he describes six weapons of influence that are often used by marketers/smart people / organisation to stir an automatic reaction from subject many a times to the benefit of the user of weapon
What are these weapons and how we should avoid them in investing when they are used against us ?
We avoid them by learning about them, Let’s start
Reciprocation – The rule of reciprocation says we should try to repay, in kind , what another person has provided for us . Seems so obvious if someone invites you for a dinner at home you do so by inviting other person to your home .
In investing how can someone trick you ? I have experienced such situations let me throw an example at you
Complete stranger on Twitter : Hi, How are you ? I have just read “Evaluating Moats through Floats” on Tankrich and have found it really helpful, I have some more question for you ?
Me : Thank you , please let me know what questions you have.
Stranger : I am a long-term investor and have 5 years’ of experience in Indian markets, I am really impressed by your analysis of companies
Me : (Clueless on conversation but have a got a feel a request is on the way)
Stranger (Continues) : Given your analytical abilities I was hoping if you can give me few stock ideas to build my portfolio
Me : (I am convinced that this gentleman is trying to play reciprocity card – Appreciation for stock tips) Thanks but I don’t provide stock recommendations
In some circumstances it would be easy to spot and ignore this weapon but many a times we would be tricked into this always look out for motive when someone is being too generous I am not asking to harbour ill will against every genuine praise or act
Commitment & Consistency – Once we have made a choice or taken a stand, we will encounter personal pressures to behave consistently with that commitment. Those pressures will cause to respond in ways that justify our earlier decision
This is by far the most influential weapon impacting investors, think about experts who have talked favourably about a stock that too in public media, after that it become extremely difficult for them to go back on their words even if the actual fundamental situation has deteriorated.
How to overcome this ?
There are certain signals – two separate kinds of signals in fact. The first sort of signal is easy to recognize. It occurs right in the pit of our stomach when we realize we are trapped into complying with a request we know we don’t want to perform
The second one ask a difficult question to yourself – “Knowing what I know, if I could go back in time, would I make same choice ?” (with new information)
Having a model portfolio was a perfect recipe for me to be affected by commitment & consistent bias once I added something to model portfolio it would be difficult for me to go back. I added V-mart and then realised I made a mistake, every single day I was feeling terrible to hold this even though stock price was heading north, finally I made a choice to exit when I was convinced that commitment bias is holding me back
As an investor need to keep asking below question every time when he does a portfolio review
“Knowing what I know, if I could go back in time, would I make same choice with new information” ?
Social proof – It states that, one means we use to determine what is correct is to find out what other people think is correct
Cloning is good investment strategy when you understand business and are able to explain rationale for investment but mindless buying or selling things because hordes of people are buying or selling would could result in huge pain
See below one of the tricks used by frauders to swindle retail investors
As share price starts hitting frenzy a lot of retail investors join the buying spree under influence of social proof
How to avoid it ? How to swim against tide ? We need to make a conscious decision to be alert to counterfeit social evidence. It is very difficult and comes with deliberate practice but as an investor it is imperative we build this into our system.
Another way I have found which works is to maintain checklist for buying and selling and then ruthlessly following it
Liking – Few people would be surprised to learn that as a rule we prefer to say yes to a request from someone who we know and like, what might be startling to note is that this rule is used by hundreds of strangers to get us to comply to their requests
How difficult it is to say ‘No’ when your friend or relative ask for an interest free friendly loan, leaving aside emergency situations rationally you would say ‘No’ but many a times we end up saying yes under influence of liking principle
Don’t have a clear answer to this as I am guilty on this front many a times, however I have found this article of great help
Authority – Have you seen those tooth paste ads where we a Doctor recommends a particular brand of tooth paste ? The reason is simple Doctors are considered to be authority on health and when a Doctor recommends a product how can you ignore it.
Stock market experts play the same game, they would come on CNBC and other news channel and would start recommending stocks, the retail investor under influence of authority would act (buy / sell) The best way to avoid is to shut the idiot box and research on your own however if you still want to utilise expert predictions and analysis read this
Scarcity – Have you seen ads like “ Last chance to get my next multi-bagger idea offer open till next 24 hours” These ads are invoking your scarcity principle so that you act. Mark my words it is difficult to churn out 10-20 multi-bagger stock ideas in a year and impossible to churn out one every day/week. Never fall for situations which are artificially created to make you feel that you have to act on it. If you read these reports from Motilal Oswal you know every year you will get few ideas which will turn your wealth to 100X yes you read it right 100X. Don’t fall for principle of scarcity
Thats were weapons of influence and my take on how to counter them
Share your experience in comments