Talking Shop
A common reaction to pointing out to investors (or indeed, anyone) that they’re as biased as a Fox reporter at a convention of transgender liberal pacifists is for them to respond, not unreasonably, by asking what they should do about it (that’s the investors, not the reporters). It turns out that it’s a lot easier to say what’s wrong than to actually do anything about it.
The A to Z of Behavioral Bias is an attempt to address that issue, but it does rather show that there’s no such thing as a common source of biases; bad behavior comes from many sources and requires many solutions. Or does it?
Toxic Arms Races
To generalize, perhaps beyond the point of reason, there are two sorts of bad behavior amongst investors. The first kind occurs because the modern investing industry is designed to be toxic for creatures like ourselves who evolved methods to deal with risk and uncertainty and duplicity in a completely different world. The same argument can be made more generally about the world outside investing, of course.
In addition, the creation of our consumerist society has led to a psychological arms race, as corporations vie with themselves to create redundancy in their products by magicking up a demand that isn’t predicated on a genuine shortage of supply. Â In investing, as in other areas where services or goods have to be sold, techniques have been evolved, by trial and error, that persuade us into parting with our money by exploiting our biases.
To Choose or Not To Choose
For many of us our problem is not the one that’s afflicted humanity for most of its history: it’s not that we have too little choice, but that we have too much. Choice overload, as it’s known (see Jam Today, Tyranny Tomorrow), has been exploited by the securities industry, amongst others, to keep prices high and reduce competition. History suggests this hasn’t been a deliberate attempt to manipulate us, but has developed by trial and error as corporations seek to maximize profits.
But now research is exposing the fault lines in our mental structures and firms and and governments are looking to use this knowledge to actively manipulate us into behaving the way that they want us to. So far, as discussed in The Nudge Unit Goes EAST; Investor Funds Go West governments seem to be using this power wisely, if rather paternalistically. I guarantee this won’t last; it’s purely a matter of time before the Nudge Wars start.
Corporations, at least, aren’t conflicted about their objectives: they are in business to make money and that means getting us to buy their stuff by any legal means possible. The advertising and marketing industries are light years ahead of the psychologists in figuring out how to manipulate us. Default choice, aka nudge theory, was being used by corporations decades ago; consumer inertia has been exploited for as long as merchants have tried to flog stuff, and the use of the decoy effect – creating a comparison product no one ever buys in order to fool us into purchasing higher priced items is common practice (see Birds, Bees and Decoy Effects for a description of how this works).Â
