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Wednesday, February 21, 2007

Influence: Psychology of Persuasion

I just finished reading Influence: Psychology of Persuasion by Robert B. Cialdini, Ph.D. Charlie Munger of Berkshire Hathaway recommends it in his Almanack.

Robert Cialdini discusses the six categories of "weapons of influence" used by "compliance" professionals. To list them:-
1. Reciprocation: The Old Give and Take.....and Take
2. Commitment and Consistency: Hobgoblins of the Mind
3. Social Proof: Truths are us
4. Liking: The Friendly Thief
5. Authority: Directed Defense
6. Scarcity: The Rule of the Few

The basic premise of the book is that there are "hot-buttons" that can be and are used to extract automatic responses from human beings. We have developed, consciously or unconsciously, short-cuts for dealing with everyday challenges or "click" and "whirr" actions. In the words of the author:
"You and I exist in an extraordinarily complicated stimulus environment, ...... To deal with it, we need shortcuts. We can't be expected to recognize and analyze all the aspects in each person, event and situation we encounter in even one day....we must very often use our stereotypes, our rules of thumb to classify things according to a few key features and then to respond mindlessly when one or another of these trigger features is present."

"....Sometimes the behavior that unrolls will not be appropriate for the situation, because not even the best stereotypes and trigger features work every time. But we accept their imperfection, since there is really no other choice. Without them we would stand frozen-cataloging, appraising, and calibrating- as the time for action sped by and away."

What is surprising is the nearly mechanical process in which all the six weapons can be activated, and the consequent exploitability of this power by anyone who knows how to trigger them. The author compares it to Jujitsu where the practitioner exploits gravity, leverage, momentum and inertia. Paramount to all of this is the ability to manipulate without the appearance of manipulation.

One of the techniques used commonly for all the weapons is the contrast principle. I have experienced it first hand while I was trying to buy my first house in the United States. My realtor took me through some of the not so well-kept houses that were priced within my low range and then took me to the one that was at the high range which would earn him higher commission. The order in which it was presented was interesting. I was tempted; however, unwittingly, I ended up using the defense that the author prescribes - gave my realtor an excuse about how I had no immediate access to the extra funds that would be required for down payment to that particular piece of property.

How does this apply to the business at hand - of buying securities? Have you had to compare a stock that is now cheaper from what it was a month ago? Or have you had to compare two stocks that are priced differently despite different EPS?

Let me discuss one of the techniques here
Reciprocation - Watch the technique used by Amway Distributors and any other process that starts with uninvited gifts. It can work in two ways - an obligation to repay favors we have received or an obligation to make a concession to someone who has made a concession to us. In the second case, the compliance practitioner starts with a bigger request and after a few "No"s ratchets it down to smaller ones. The author calls it the 'rejection-then-retreat' technique.

The good thing about the book is that it is replete with anecdotes and detailed instances of the weapons in practice. The other is having outlined the use of the weapons, the author goes on to talk about how to defuse its effects. This is where the academic nature of the book ends and practicality begins, in my opinion. Let me end the review with author's motivation for writing the book. In his own words from the epilogue to the book:-

"..When making a decision, we will less frequently enjoy the luxury of a fully considered analysis of the total situation but will revert increaingly to a focus on a single, usually reliable feature of it.
When those single features are truly reliable, there is nothing inherently wrong with the shortcut approach of narrowed attention and automatic response to a particular piece of information. The problem comes when something causes the normally trustworthy cues to counsel us poorly, to lead us to erroneous actions and wrongheaded such cause is the trickery of certain compliance practitioners who seek to profit from the rather mindless and mechanical nature of shortcut response..
...more than evasive action, I would urge forceful counterassault. There is an important qualification, however. Compliance professionals who play fairly by the rulse of shortcut response are not to be considered the enemy; on the contrary, they are our allies in an efficient and adaptive process of exchange. The proper targets for counteraggression are only those individuals who falsify, counterfeit, or misrepresent the evidence that naturally cues our shortcut responses.....
In short, we should be willing to use boycott, threat, confrontation, censure, tirade, nearly anything to retaliate.....
It is important to recognize, however, that thier motive for profit is not the cause fo hostilities....the real treachery, and the thing we cannot tolerate, is any attempt to make their profit in a way that threatens the reliability of our shortcuts."

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