Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi there!
Reading time: About 4 minutes
Quote
“The only true wisdom is in knowing you know nothing.”
― Socrates
Mental Model
Reciprocity
Reciprocity is simply what goes around comes around. This mental model comes from physics.
Farnam Street,
“In physics, reciprocity is Newton’s third law, which states that for every force exerted by object A on object B, there is an equal but opposite force exerted by object B on object A. Every force involves the interaction of two objects where the force asserted by one is reciprocated with an equally powerful and directionally opposite force by the other object. Forces always occur in pairs of the same type of force, and it is not possible for one object to exert a force without experiencing a reciprocal force.”
For every action, there is an equal and opposite reaction.
Newton’s third law
So when we jump we exert force on the ground. When we land the ground also applies the same exact force but opposite. This force is known as gravity.
We have seen the physics side of reciprocity as to how whatever we do even when we are standing still the ground has an equal and opposite reaction to it. Now let’s see how reciprocity works in different fields.
In psychology
We would love it if the principle for every action there is an equal reaction. If we do some good we expect some good to come to us. If we do something bad then there should be something bad that happens to us.
Robert Cialdini in his book Influence talks about reciprocity. He says that “The principle of reciprocation obligates people to give back the behaviour they have received.”
Reciprocal Concessions
A requester uses this procedure by beginning with an extreme request that is almost always rejected and then retreating to a more acceptable favor- the one the requester had in mind from the outset. In doing so, the, requester hopes that the retreat from extreme to moderate request will spur the target person to make a reciprocal concession- by moving from initial rejection of the larger favor to acceptance of the smaller one. This reciprocal concessions strategy has been successfully used in fundraising contexts where, after refusing a larger request for donations, people are substantially more likely than before to give an average- size contribution.
In Investing
In investing we should look for companies which use this reciprocity to their advantage and create win-win situations for everyone involved.
One of the businesses that work like this amazingly is Costco. They buy goods in bulk and buy it with cash. This way the suppliers are happy and give them a little bit of a discount. With this cost advantage Costco makes it cheaper for the consumers to buy the product. So everyone in this eco system is winning.
So how does Costco make money? They don’t sell goods at a profit you sell it at cost.
They make money through memberships. Because Costco provides these great things to the consumers they are willing to pay money for the membership. It is a win-win situation.
Even Amazon is a great example.
“Once you become a Prime member, your human nature takes over. You want to leverage your $79 as much as possible," he says. "Not only do you buy more, but you buy in a broader set of categories. You discover all the selections we have that you otherwise wouldn't have thought to look to Amazon for.” And what you buy at Amazon you won't buy from your local retailer.”
Conclusion
Reciprocity is a good principle to keep in mind. It can be useful to exploit every once in while. Even while looking for companies one of the things you want to look for is the fact that all stakeholders are happy. It is a good mental model and one that is useful in every avenue.
Interesting find
That’s it for this week!
Enjoy your weekend! Happy learning!\