Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi!
Reading time: About 4 minutes
Quote
“You don’t want to expect perfection in yourself. You want to strive to do your best. It’s too demanding to expect perfection in yourself.”- Buffett
Mental Model
Pavlovian mere association
Ivan Pavlov was a scientist who conducted a famous experiment, he gave a dog food only after ringing a bell. He followed this routine for a while till the dog got used to it. After a while he noticed that when he rang the bell, the dog stuck his tongue out waiting for the food. He associated the bell with the food. He did not smell or see any food, only by hearing the sound of the bell he assumed there would be food brought to him.
This bias is not applicable to dogs only. Even we humans tend to associate one thing with something. For instance if I have had a bad experience in trains, I associate a ride in a train with some negative emotion.
Peter Bevelin writes in his book Seeking Wisdom,
Experiments have shown that we can learn to fear a harmless stimulus if it is paired with an unpleasant one. If for example rats consistently receive mild electrical shock after hearing a tone, the rats learn to develop a fear of the tone alone.
Now I have a question to ask.
When you go out to buy luxury items, do you analyse the product to see whether the product is superior or do you see the price tag and assume the product is superior because of it’s price?
Be real.
Well we associate a high price with high quality. This is not always true. The experiment below shows why.
In Business
Well in what I consider one of Munger’s best talks, Practical Thought on Practical Thought.
Munger spoke about Coca Cola and how he would take it from 2million to 2trillion in 150 years,
The neural system of Pavlov’s dog causes it to salivate at the bell it can’t eat. And the brain of man yearns for the type of beverage held by the pretty woman he can’t have.
…we must use every sort of decent, honorable Pavlovian conditioning we can think of. For as long as we are in business, our beverage and its promotion must be associated in consumer minds with all other things consumers like or admire.
Coke has done just that. They have associated their drink with the emotion of happiness. They have advertised their product in a way which makes us think if we want to be happy we need a coke in our hands.
Even Mcdonalds does this. They associate their company with happiness and love.
Now as a CEO how does it affect us?
Ceo’s usually receive a lot of bad news. It’s natural. Some things work some don’t. It is critical to take bad news in a good way. Some CEO’s see bad news and associate with people telling him he is incompetent.
Charlie uses the example of CBS(as warning) and explains how this problem is tackled in Berkshire –
Chairman Paley (at CBS) was hostile to people who brought him bad news. The result was that Paley lived in a cocoon of unreality, from which he made one bad deal after another, even exchanging a large share of CBS for a company that had to be liquidated shortly thereafter….At Berkshire, there is a common injunction: Always tell .the bad news promptly. It is only the good news that can wait. It also helps to be so wise and informed that people fear not telling you bad news because you are so likely to get it elsewhere.
This was done because Paley hated bad news. After a point the employees understood. So they stopped telling him the bad news.
In Investing
In Investing we have a general consensus that the whole economy can be explained by the movement of the top 30/50 companies in the country. We associate the index with the whole economy.
We stereotype a lot of companies which are PSE’s, Waste Management, etc. companies which are assumed by everyone to be bad. They associate these companies to only the bad things and ignore all the good they do. This mistake of the public can be a huge advantage to a value investor. He can look into companies which are hated by the public.
Conclusion
Farnam Street has written the conclusion for this post in an excellent manner,
When thinking about this bias it’s important to keep in mind that: (1) people are neither good nor bad because we associate something positive or negative to them; (2) bad news should be sought immediately and your reaction to it will dictate how much of it you hear; (3) to end a certain behavior or habit you can create an association with a negative emotion.
Interesting find
Resources for the post:
SafalNiveshak blog on Pavlovian conditioning
Farnam Street blog on Bias from mere association: Why we shoot the messenger
Thank you for reading and Merry Christmas!
Samvit.