One of my favorite subjects involving investing are the intellectual errors we humans engage in on regular basis. Most of these foibles are built into our "wetware." The combination of evolutionary developments and our natural tendencies to seek pleasure and avoid pain have led to certain behavioral patterns that undermine our best efforts as investors. As we pointed out in Know Thyself, when it comes to investing, we humans just ain’t built for it.
Whenever I get questioned on that, I refer to Thomas Gilovich’s book "How We Know What Isn’t So." Gilovich, a psychology prof a Cornell, details many of the cognitive errors we unknowingly engage in. People regularly push back on this, believing they are rational (or mostly rational) and are free from preconceived biases.
This is, of course, utter nonsense.
I often come across non-investing examples of how much of our behavior is hardwired and chemical, and where we engage in unconscious automatic tendencies. Our behavior is impacted by factors which we are wholly unaware of. While this may not appear to directly correlate to markets and trading, they indirectly show how easily our brains can be fooled.
A fascinating example I came across recently this involves food, diet, and how we eat. Typical diet plans focus on what we eat: fat content, calories, quantity, and exercise (Note that the diet industry is estimated to be $40-100 B per year). It turns out our brains regulate our food consumption in ways we are not conscious of. Often, environmental cues will influence our food intake.
Brian Wansink (also of Cornell) has been called the "Sherlock Holmes of Food." He is the director of the Cornell University Food and Brand Lab, and is the author of Mindless Eating: Why We Eat More Than We Think. Wansink claims that our minds make more than 200 food-related decisions a day — most of them without any actual thought.
It turns out the circumstances of consumption greatly impact how much we consume. Consider these example from Wansink and Mindless Eating:
Container size influences how much we eat: Moviegoers given five-day-old stale popcorn still ate 53% more if it was served in a big bucket than a small bucket.
Size of a serving bowl, a plate, or a package has repeatedly been shown to bias how much a person serves himself and eats by an average of 20-30%.
Glass Shapes: Because of visual illusions, people (even bartenders) pour 28% more liquid into a short wide glasses than tall ones.
We eat more if we like what we’re drinking: In one study, diners drank the same wine but 1/2 were told it was from California, and the other 1/2 were told it was North Dakota wine (No, ND does not make wine). Those who thought they were drinking California wine ate 11% more food.
Bulk Purchases: 50% of the snack foods bought in bulk (such as at a warehouse club store) are eaten within 6 days of when it is purchased (Wansink and his Food and Brand Lab have been credited with the discovery of the 100 calorie packs)
Names of a food can create either positive or negative predispositions that can unfairly bias a person’s perceived taste of a food.
Self Service: A person will eat an average of 92% of any food they serve themselves.
We don’t pay attention to the extras: 31% of people leaving an Italian restaurant couldn’t remember how much bread they ate; 12% of the bread eaters denied having eaten any bread at all.
We eat more if the evidence is removed: In a study of chicken-wing eaters, waitresses removed the bones from half the tables while letting them stack up on the other half. The diners who still had piles of bones on their plates ate 28% less.
Too much variety makes us overeat: Snackers were given bowls of M&Ms with either 7 or 10 colors of the candy. Snackers with 10 color options ate an average of 43 more candies than those with just 7 colors to choose from.
Proximity of candy on one’s desk has been shown to double how much a person eats over the course of a day
Friends make you eat more: You’ll eat 35% more dining with a friend than when eating alone. Even worse, a person will double the amount of food ingested when dining in a group of 7 or more.
Eating fast makes you consume more calories: Consider this University of Rhode Island study on diet: researchers showed the speed at which we eat influences caloric intake. Faster eaters consumed on average 67 more calories then when they ate slowly. That’s about seven pounds of per year. (People also reported feeling more full after eating slowly).
What does this have to do with markets and investing?
It turns out, a whole lot. Many of our behaviors and belief systems are based upon elements we are wholly unaware of. We believe in myths, make false assumptions, overtrade, and engage in many investing behaviors that are destructive — most of the time completely oblivious to them.
Investors are well served if they become aware of these tendencies — and take steps to avoid fooling their own brains.
John S. Dyson Professor of Marketing
Food and Brand Lab
Department of Applied Economics and Management
Latest Weight-Loss Advice: Slow Down and Pay Attention
WSJ, January 16, 2007; Page D1
The diet business: Banking on failure
BBC News Online, Wednesday, 5 February, 2003, 10:03 GMT