How the tendency to make decisions based on associations can mislead us
07-Sep-2015 •Mohammed Ekramul Haque
What is it? This is the tendency of humans to be misled because of prior associations. This behaviour, says Munger, is a "responsive behavior, creating a new habit, is directly triggered by rewards previously bestowed." Take the example of a man buying a branded shoe polish. He has a good experience with it, and because of this experience he buys the same shoe polish when he needs another.
A common form of influence from association comes from something we are well aware of. This is called blanket stereotyping. For example, if someone is a Punjabi, we assume that he will be a hearty eater; if a Bengali, he should be cultured in the arts; if a South Indian, he must be brainy; if an Indian, he must be argumentative in nature.
Then there is another type of association - that of a news messenger and the bad news he delivers. "Another common bad effect of the mere association of a person and a hated outcome is displayed in the "Persian messenger syndrome." Ancient Persians actually killed some messengers whose sole fault was that they brought home truthful bad news, say, of a battle lost. It was actually safer for the messenger to run away and hide, instead of doing his job as a wiser boss would have wanted it done."
Munger's prescription to avoid the mere-association tendency is pure genius. "To avoid being misled by the mere association of some fact with past success, use this memory clue. Think of Napoleon and Hitler when they invaded Russia after using their armies with much success elsewhere."
He further elaborates, "The proper antidotes to being made such a patsy by past success are (1) to carefully examine each past success, looking for accidental, non-causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking and (2) to look for dangerous aspects of the new undertaking that were not present when past success occurred."
Often found in: Classifying products, brands or persons
In Life: Take the association with price, for example. What do we normally tend to think about a product if it is priced higher? We think that the it offers better quality. Munger warns against this. "Knowing this, some seller of an ordinary industrial product will often change his product's trade dress and raise its price significantly, hoping that quality-seeking buyers will be tricked into becoming purchasers by mere association of his product and its high price. This industrial practice frequently is effective in driving up sales and even more so in driving up profits... With luxury goods, the process works with a special boost because buyers who pay high prices often gain extra status from thus demonstrating both their good taste and their ability to pay."
Love causes a powerful influence- from-mere-association tendency. People tend to get blind in love. Often mothers of convicted killers grieve with conviction about the innocence of their sons. Says Munger, "People disagree about how much blindness should accompany the association called love. In Poor Richard's Almanack, Franklin counseled: 'Keep your eyes wide open before marriage and half shut thereafter'. Perhaps this "eyes-half-shut" solution is about right, but I favor a tougher prescription: See it like it is and love anyway."
In corporations: Corporations extensively employ this tendency. Says Munger, "Advertisers know about the power of mere association. You won't see Coke advertise alongside some account of the death of a child. Instead, Coke ads picture life as happier than reality." Many aspiring brands utilise star power to sell their products.
Munger cites how the Persian messenger syndrome also affects corporations to cause huge losses. "CBS, in its late heyday, was famous for occurrence of the Persian messenger syndrome because Chairman Paley 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."
"The proper antidote to the Persian messenger syndrome and its bad effects is to develop, through exercise of will, a habit of welcoming bad news. At Berkshire, there is a common injunction: Always tell us the bad news promptly. It is only the good news that can wait."
You just read about one of the misjudgements people generally make while investing. Read 25 ways to (Not) make mistakes to get an account of Charlie Munger's twenty-five typical misjudgements, along with our commentary on how they fit into Indian businesses and Indian investments.