Nick is doing an MA in behavioral economics at IDC Herzliya. We reached out to him for an interview because he curates the Behavioural Economics podcast playlist. As it happens, he’s also been interviewed on Merle’s blog, whom we interviewed recently ourselves! Yes, we’ve reached that stage of penetrating the behavioral finance landscape. Nick covered a lot of territory but the most important messages came from 5 studies, a book and a TED talk. Before summarising them, here’s a talk by Brené Brown on Vulnerability:
We spoke briefly on vulnerability at the beginning of our interview since us three are men and so talking about emotions is taboo. Somewhat tragically, however, emotion expression avoidance by men is a missed opportunity to do something manly, which is to display strength. Why? Emotional expression by men is viewed in the west as a display of vulnerability. Paradoxically, being vulnerable in public is a good way to display one’s strength.
Onto the summary.
Medals
Matsumoto and Willingham (2006) found that bronze medal winners at the 2004 Greece Olympics smiled more than those who won silver. This highlights how success feels relative, since the silver medal winners were thinking about how they’d lost gold whereas those with bronze were happy to have won anything at all. In reality, though, silver is genuinely better than bronze. Are you letting your financial position and achievements become obscured in a similar manner?
Futured Language
Since the second episode with Tom Watts, we’ve been talking about delay discounting or hyperbolic discounting. This is the idea that events far into the future feel less important than those happening now. It affects our attitude about money also, potentially reducing our willingness to invest for a large return far into the future. Chen (2013) found that the cause of this is language. Some languages describe the weather as “Yesterday it rained”, “Now it is raining” and, crucially, “It will rain tomorrow”. Others say “It rained tomorrow”. Here is a slide from Chen’s TED talk:
A great quote from his talk is:
“You speak English, a futured language, and what that means is that every time you discuss the future or any kind of a future event, grammatically you’re forced to cleave that from the present and treat as if it’s something viscerally different. Now, suppose that that visceral difference makes you subtly disassociate the future from the present every time you speak. If that’s true, and it makes the future feel like something more different and more distant from the present, that’s going to make it harder to save.”
Emphasis mine.
This is useful for a direction on the app, and it would be interesting what tools Keith has made that he talks about at the end of his presentation.
The Behavioral Investor
Next, Nick referred to Crosby (2018), who wrote the book on behavioral investing that is the basis for our podcast, right down to the name. We don’t need to mention more of it here apart from this great summary of it by The Swedish Investor:
Clouded Judgement
Simonsohn (2007) revealed a somewhat outrageous bias in the college admissions process where sunny weather led to a higher admission rate. Not only that, but the academic performance of applicants was taken more seriously on cloudy days than sunny days! Nick used this to highlight how we should take what we do less seriously as there are obviously so many factors that bias people. Just focus on what you do and doing it repetitively enough will eliminate the effect of these intermittent biases.
Continuing this theme of outrageous bias in decision making process that are important for the structure and quality of society, Danziger, Levav, and Avnaim-Pesso (2011) found that judges were not even-handed in their sentencing. The point is best made in the abstract for this study: “…. We record the judges’two daily food breaks, which result in segmenting the deliberations of the day into three distinct “decision sessions.” We find that the percentage of favorable rulings drops gradually from ≈65% to nearly zero within each decision session and returns abruptly to ≈65% after a break. Our findings suggest that judicial rulings can be swayed by extraneous variables that should have no bearing on legal decisions.”
If judges can’t even overcome biases then what hope do us humble retail investors have in avoiding the temptations of Mr Market!
Emotion Laundering
A final study Nick mentioned, in which Levav was also involved, was Levav and McGraw (2009) on the topic of emotional accounting. This accompanies the concept of mental accounting, which Thaler (1999) observed causes people to deny the fungibility of money. An example is how people respond to ‘found money’ or windfalls. People feel that this money can be spent more frivolously than the same amount gained through work and steady saving. Nick and Ben discussed Wil’s comments on Twitter about being able to buy a Porsche with his $RVLV gains:
Ben pointed out that one might be less likely to speak in such gleeful terms about one’s savings achievements. Levav and McGraw extend this concept by finding that people who receive a windful under negative circumstances will emotionally tag these funds. They use the intriguing concept of emotion laundering with this money, washing it of its negative valence by only spending it on virtuous things.
Turns out Levav has had an interesting research career, let’s look at another of his studies, about the effect of female touch on stock trader’s willingness to take risk (Levav & Argo, 2010). As opposed to male touch, it was found that “comforting pat on the shoulder led participants to greater financial risk taking.” I wonder how many trading floors around the world have a creepy, ritualistic touch start to the day…
Humans are indeed vexed financial beings.
REFERENCES
Chen, M. K. (2013). The effect of language on economic behavior: Evidence from savings rates, health behaviors, and retirement assets. American Economic Review, 103(2), 690-731. Accessed 24/7/21: https://www.jstor.org/stable/pdf/23469680.pdf.
Crosby, D. (2018). The Behavioral Investor. Harriman House. Accessed 24/7/21: https://www.amazon.co.uk/Behavioral-Investor-Daniel-Crosby/dp/0857196863.
Danziger, S., Levav, J., & Avnaim-Pesso, L. (2011). Extraneous factors in judicial decisions. Proceedings of the National Academy of Sciences, 108(17), 6889-6892. Accessed 24/7/21: https://www.pnas.org/content/pnas/108/17/6889.full.pdf?nr_email_referer=1%29%2C.
Levav, J., & Argo, J. J. (2010). Physical contact and financial risk taking. Psychological Science, 21(6). Accessed 24/7/21: https://journals.sagepub.com/doi/abs/10.1177/0956797610369493.
Levav, J., & McGraw, A. P. (2009). Emotional accounting: How feelings about money influence consumer choice. Journal of Marketing Research, 46(1), 66-80. Accessed 24/7/21: https://journals.sagepub.com/doi/pdf/10.1509/jmkr.46.1.66.
Matsumoto, D., & Willingham, B. (2006). The thrill of victory and the agony of defeat: spontaneous expressions of medal winners of the 2004 Athens Olympic Games. Journal of personality and social psychology, 91(3), 568. Accessed 24/7/21: https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.491.414&rep=rep1&type=pdf.
Simonsohn, U. (2007). Clouds make nerds look good: Field evidence of the impact of incidental factors on decision making. Journal of Behavioral Decision Making, 20(2), 143-152. Accessed 24/7/21: https://onlinelibrary.wiley.com/doi/pdf/10.1002/bdm.545.
Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12(3), 183-206. Accessed 24/7/21: https://onlinelibrary.wiley.com/doi/abs/10.1002/%28SICI%291099-0771%28199909%2912%3A3%3C183%3A%3AAID-BDM318%3E3.0.CO%3B2-F.
S3E4 🤗 Being Intelligent about Emotions with Nick Mishkin