Charlie Munger's Top Recommendation
Influence: The Psychology Of Persuasion by Robert Cialdini- the book of which legendary investor and vice chairman of Berkshire Hathaway Charlie Munger said, "This is the book that I give most often as a present and is my top recommendation." So what is this book about psychology doing on a personal finance website? The answer is that behavioral psychology effects peoples decisions and can therefore help one understand markets as well as their own behavior. As Charlie Munger stated, " I came to study the psychology of human misjudgement almost against my will. I rejected it until I realised that my attitude was costing me a lot of money and reduced my ability to help everything I loved." Let's jump into a summary of some of the main concepts, or "rules of influence" covered in the book.
Rule One: Reciprocation
As Cialdini states, "According to sociologists and anthropologists, one of the most widespread and basic norms of human culture is embodied in the rule of reciprocation. The rule requires that one person try to repay, in form, what another person has provided. By obligating the recipient of an act to repayment in the future, the rule allows one individual to give something to another with confidence that it is not being lost. This sense of future obligation within the rule makes possible the development of various kinds of continuing relationships, transactions, and exchanges that are beneficial to society. Consequently, all members of all societies are trained from childhood to abide by the rule or suffer serious social disapproval."
We'll discuss how this rule can be used from a customer standpoint and from a sales standpoint. On the customer side, one might be wary of the free goods and services you receive from companies or individuals trying to sell you things. Who doesn't love free stuff? Take it, just don't let it influence you in an undue manner, especially when considering large purchases. For example, are you purchasing that $500,000 house with that real estate because they are an excellent, competent agent or because they sent you a Christmas card and some trinkets?
Cialdini cites a study done in a California candy shop where researchers studied the purchasing patterns of customers who were given a free sample versus customers who were not given a sample. They found that customers who received the free sample were 42 percent more likely to make a purchase. You may say this is because the consumers liked the taste of the piece of candy, but it was found that they purchased more of other types of candy as well. So, next time you go to Costco ask yourself, "are these free samples really free?" As long you don't let them subconsciously influence your purchases, they are free.
From a sales standpoint, you could use the rule of reciprocity to your benefit, especially if the value of the items you give the consumer are small relative to the value of the potential purchase. I worked with many successful real estate agents who would routinely spend thousands of dollars on gifts to send to their contacts list. They did so with confidence because they knew the rule of reciprocation would mean this money would come back to them many times over.
Rule Two: Liking
This one might seem obvious, but though most people are aware that liking someone influences their decisions, they underestimate the degree to which this is true. Cialdini highlights this with the following example. "An experiment done in North Carolina shows how helpless we can be in the face of praise. The men received comments about themselves from another person who needed a favor from them. Some of the men not only got positive comments, and some got a mixture of good and bad. There were three interesting findings. First, the evaluator who provided only praise was liked the best. Second, this tendency held true even when the men fully realized that the flatterer stood to gain from their liking of him. Finally, unlike the other types of comments, pure praise did not have to be accurate to work. Positive comments produced just as much liking for the flatterer when they were untrue as when they were true."
So when someone gives you a compliment enjoy it- but if they are trying to sell you something, keep in mind they might have an ulterior motive. For our part, we are here at Financial Education Today know you're brilliant and discerning enough to be aware of when you're being hoodwinked. Just remember the words of Jonathan Swift, "Tis an old maxim in the schools, that flattery is the food of fools."
Rule Three: Social Proof
Cialdini goes on to illustrate another crucial rule of influence, that of social proof. Social Proof simply means that we base our own thoughts and opinions on the thought and opinions of others. According to Cialdini, "We view an action as correct in a given situation to the degree that we see others performing it. As a result, advertisers love to inform us when a product is the "fastest growing" or "largest selling" because they don't have to convince us directly that their product is good; they need only show that many others think so, which often seems proof enough."
One of the reasons to read Influence is that it is full of excellent empirical studies which back up Cialdini's rules of influence. Two striking examples of this he lays out follow. "In one study, after being told that the majority of their peers favored the use of torture in interrogations, 80 percent of college students saw the practice as more morally acceptable." As far as Social Proof in on the web, "98 percent of online shoppers say that authentic reviews are the most important factor influencing their purchase decisions."
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Rule Four: Authority
Do it now, because we told you to! Cialdini now exposes how, in spite of the fact that many of us consider ourselves to be strong-willed and rebellious, most people respond strongly to authority. The chapter begins with a summary of a truly shocking study called the Milgram experiment- if you aren't familiar, you can read more about it here.
Cialdini then informs us of three of the most common ways authority can be conveyed- through titles, clothing and trappings such as jewelry and cars. Influence presents many examples of the sway over people's decision these symbols of authority can hold. As stated in the book, "In studies, individuals possessing prestigious forms of or another of the symbols (and no other legitimizing credentials) were accorded more deference or obedience by those they encountered. Moreover, in each instance, those individuals who deferred or obeyed underestimated the effect of the authority pressures on their behaviors."
Rule Five: Scarcity
The less common something is, the more people want it. As Cialdini sums it up, "According to the scarcity principle, people assign more value to opportunities that are less available. The use of this principle for profit can be seen in such compliance techniques as the "limited number" and "deadline" tactics, wherein practitioners try to convince us that if we don't act now, we will lose something of value. This engages the human tendency for loss aversion - that people are motivated by the thought of losing something than the thought of gaining something of equal value."
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Rule Six: Commitment and Consistency
As Ralph Waldo Emerson once said, “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines." Commitment and Consistency is a tactic often used by sales people and is also sometimes known as the "foot-in-the-door technique", wherein one is asked to comply with a small request in order to pave the way for compliance with a larger request.
Cialdini states in the chapter summary, "After making a commitment (that is, taking an action, stand or position), people are more willing to agree to requests in keeping with the prior commitment... Commitments are most effective when they are active, public, effortful, and viewed as internally motivated (voluntary), because each of these elements changes self-image. The reason they do so is that each element gives us information about what we must truly believe."
Given that you've read this far, you might as well remain consistent and read the full book, which is full of case studies and also contains many funny cartoons taken from popular comic strips Cialdini use to reinforce his assertions. Invest in yourself and your financial education today. Click here to purchase Influence: The Psychology Of Persuasion.
