Behaviouronomics

In philosophy, a razor is a principle or rule of thumb that allows one to eliminate or shave off unlikely explanations for a phenomenon, or avoid unnecessary actions. Occam’s Razor is one such well-known heuristic. I had written about it a few years back. You can read it here.

When it comes to reasoning, elimination is a more robust strategy than adding. Sherlock Holmes famously said, “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”

Shaving off the untrue guarantees to leave you with the most probable version of the truth. From that logic, investigating any phenomenon using razor like thumb rules is a very efficient way of better thinking. Better thinking leads to better judgment and decision making. Better judgment and decision making result in better action.

[Read more…] about Behaviouronomics: Hanlon’s Razor

Before we begin, let me dazzle you with my secret superpower — the ability to assess people’s personality without meeting them. In other words, even though I don’t know you personally, I can make a reasonably accurate prediction about your personality. I just need one thing from you. Think of a number between 5 and 10 and keep it at the back of your mind while I recite the results of your instant personality assessment test.

Here we go —
[Read more…] about Behaviouronomics: Barnum Effect

Imagine you’re on the board of a fairly large company. The business has three verticals — IT services, Investment Advisory, and Organic farming. The CEO is making a presentation to the board about next year’s plan for investing additional capital in each business vertical.

After rushing through a dozen slides on broader industry trends and macroeconomics, the CEO comes to the slide which shows that the company generated a revenue of Rs. Five hundred crores in the recent financial year which translated to a bottom line of Rs. One hundred crores. A decent 20 percent profit margin.

“This year I propose that we put all our focus and investment capital for growing the Investment Advisory vertical.” argues the CEO.

“I understand that you’ve worked for several years in the finance industry,” interjected a senior board member, “and that may give you the confidence about the future prospects of money management business. But do you have any other data to support your argument especially in the context of our company’s business?”

“As a matter of fact, I do.” quips the CEO. “And I am glad you asked that, sir.” It was evident that the CEO was prepared for this question. In fact, he was saving up a special slide just for this.
[Read more…] about Behaviouronomics: More Pie than Plate

Influence by Robert Cialdini is a book that I always keep face out on my bookshelf. Not a month goes by when I don’t pick it up and thumb through random chapters. Cialdini first published his book in early 1980s and it’s still revered as the bible of human psychology by many including Charlie Munger.

You couldn’t start with a better book than Cialdini’s ‘Influence’, writes Munger, “Academic psychology has some very important merits alongside its defects. I learnt this eventually, in the course of general reading, from this book, ‘Influence’, aimed at a popular audience. I immediately sent copies of Cialdini’s book to all my children. I also gave a share of Berkshire stock [A share] to thank him for what he had done for me and the public.”

Today, a single class-A share of Berkshire stock is valued at over $300,000. On another occasion, Munger wrote –

Fairly late in life I stumbled into this book, Influence, by a psychologist named Bob Cialdini.. Well, it’s an academic book aimed at a popular audience that filled in a lot of holes in my crude system. In those holes it filled in, I thought I had a system that was a good-working tool.

Cialdini opens the first chapter with a story of his friend who had a jewelry store. The story involved a certain turquoise jewelry that she was finding hard to sell. In spite of a busy tourist season and an overcrowded store her customers were ignoring the turquoise pieces. She experimented with few standard sales tricks like displaying them prominently and even asking the sales staff to push the turquoise jewelry items hard. But no luck. She was unable to move them.
[Read more…] about Behaviouronomics: The Veblen Effect

Imagine you are walking down the street. As you wait for the traffic light to turn red so that you can cross the busy intersection, you feel a gentle tug on your shirt from behind. You turn around to find a ten-year-old boy smiling at you.

“Hey buddy!” you greet him while trying to match his elated body language.

“My name is Krish,” he replies while maintaining his ear-to-ear smile.

“How can I help you, Krish?”

“Do you see the tall apartment over there?” he points towards a multistoried building across the street, “I stay there. Our apartment society is organizing a play for social awareness. The show is on Saturday night. And I am selling tickets for the same. It’s ₹250. Would you like to contribute?”
[Read more…] about Behaviouronomics: Reciprocal Concessions