Charlie Munger, a billionaire value investor, has always been big on trying to understand cognitive biases and irrationalities involved in decision making processes. This month’s book, Sway: The Irresistible Pull Of Irrational Behavior by Ori Brafman and Rom Brafman, is along the same topic as the book outlines why people act irrationally. This 5 hour audio-book draws your attention to various behavior patterns. Some of the interesting concepts discussed in Sway were: the power of relativity, the fact that anchors stay with us long after our initial decision, the power of zero (free), the difference between market norm and social norm, the effects of placebos, the importance of price when making decisions, the correlation between mortality and honesty, and the idea that cheating is a lot easier when it is a step removed from money. In this blog post, I will talk about the 5 major takeaways from this read. Let’s dive in.
Loss Aversion – This is the idea that people are fearful of losses, and can go to any extent in order to minimize or avoid those losses. For example, assume that you bought a few shares of Apple a few months ago, and were making a $4500 profit. Today, Apple’s stock price plummeted, and you are now actually making $350 loss on your investment. Rather than cutting out your losses early, you might double down and buy more shares. Individuals are just afraid of making a loss. If you make your decisions while focusing on “loss aversion” and “commitment”, then you are set for failure. In other words, when individuals are committed to a stock or a decision and are unwilling to accept any kind of losses associated with that decision, it is very difficult for those individuals to part ways from that investment.
Value Attribution – This is the idea that people’s opinions are based on perceived value rather than objective data. The author gave the example of a world-famous violinist who is mistaken for a street musician in the subway (video below). From the video, we can see that people have a pre-existent opinion that there would never be a world-famous violinist play for FREE at the subway, so rather than judging his music “objectively”, the value attribution takes over and all the commuters simply ignore the subway musician. Lastly, the author drives home the point that when things are selling at a discounted price, people tend to give that product a reduced value attribution.
Diagnoses Bias – This bias refers to the human propensity to label people, ideas, or objects based on their initial opinions, and the inability to reconsider those initial judgments/decisions. The author gives various examples where individuals completely disregarded the facts simply because of existent labels and inability to reconsider those initial labels. The author talks about how even an introduction of a professor can set a tone of how the professor is going to be labeled as for the rest class. The best way to deal with this bias is by being mindful and observant of the facts, and by being willing to accept that your initial impression could be wrong.
Fairness – The author points out that everyone everywhere believes in fairness and justice. The author gives the example of “Who wants be a millionaire?” game show and how different cultures see “fairness” in different ways. In the game show, audience members in certain countries (Russia) would purposely give the contestant the wrong answer because culturally it was not “fair” for that person to get that answer right. So, the author brings up a good point that are we actually being fair or are we simply wearing a cultural lens that defines fairness for us?
Personal Construct Theory – According to this theory, people make diagnostic errors when they narrow down their field of possibilities and zero in on a single interpretation of a situation or a person. The author claims that all of us have certain lenses that we use to shift through the endless flow of information that we encounter. For instance, when you meet new people, you may judge them on whether they dress well or poorly, whether their shoes are polished or not, whether they are religious or secular, etc. At the end of the day, it depends on the individual to pick which lens he/she wants to view each situation with.
Overall, I thought this was a short and engaging book. I would recommend this book to anyone who is interested in learning about different biases and irrationalities in our decision making processes. The book has a lot of good research examples, which kept me entertained from start to finish. It is definitely a good listen.
Hope you learned a little and found this blog post helpful. We talked about this month’s book: Sway: The Irresistible Pull Of Irrational Behavior. We also talked about the 5 major takeaways from this book. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions.