Psychology of Misjudgment #10. Influence-from-Mere Association Tendency

[LongHaul]

10. Influence-from-Mere Association Tendency

 

…there is another type of conditioned reflex wherein mere association triggers a response. For instance, consider the case of many men who have been trained by their previous experience in life to believe that when several similar items are presented for purchase, the one with the highest price will have the highest quality. 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.

 

The correlation of quality with a higher price is abused by advertisers. Coca-cola does this. Apple does this. All luxury brands do this too. Sometimes you get what you pay for. Sometimes you pay extra for the label.

 

Munger gives another example of someone who gambles for the first time on a low probability bet and sees it pays off. So he repeats the bet and loses, and continues to repeat it and lose because he never bothered to consider his win was pure luck. The association of winning with a low probability bet compounds stupid decisions.

 

The solution is to weigh decisions independent of the result:

 

Carefully examine each past success, looking for accidental, non­causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking.

[DooDiligence]

I did this by associating fantastic gains from the purchase & sale of LEAP Calls on EW around 2013. The gains were further extended by purchasing the equity at the same time. A gift that keeps on giving.

 

I tried to replicate this with Altria with abysmal results.

 

I still own the Jan 2021 $50 Calls & expect to book a loss on those.

 

I got lucky with EW & don't believe I'll try this again.

 

---

 

This concept may also apply to shallow impressions of people.

[Guest cherzeca]

"I got lucky with EW & don't believe I'll try this again."

 

or maybe you have to do it again repeatedly, and be thankful if you score another hit.  obviously, risk/money management comes into this, but if you can do this trade in a manner that exposes you to upside convexity with cabined loss, then the loss experience should not preempt another try...or to put it into your associative meme, the association was not that this prior trade winning means that another similar trade will, but rather another one could

[LC]

The solution is to weigh decisions independent of the result:

 

Carefully examine each past success, looking for accidental, non­causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking.

 

As the quoted section states, this is really a process vs. outcome question. Or put into COBF terms, investment (repeatable process) vs. speculation (outcome guessing).

 

So, build a good process. Determine the inputs and estimate their value contribution. No practitioner is perfect, so leave room for mistakes. No process is comprehensive, so leave room for luck.

[SharperDingaan]

Think of your career.

For most people - the industry you work in - is the industry in which you got your first full-time job. For the CPA, CFA, lawyer, etc. - it is the industry you went to as soon as you got your designation. Anytime you change jobs, that will be the industry where you are the 'best fit', and where you will get paid most. PROCESS keeps you in the industry swim-lane, and luck chose the industry - it was just where the jobs were at the time. It is the same in investing.

 

To change careers requires ongoing flexibility, significant effort, and ability to absorb loss for an extended period (ask anyone in o/g). An individual might use a MBA/PhD as the change vehicle, an IT manager might use Agile Project Management. A PM has to rely on how often the 'phone rings - today's star value investor being tomorrow's bum. Successful investing requires ongoing mental flexibility, and continuous expansion of circle of competence.

 

A great antidote is to learn how to simultaneously play chess against 4-5 other players, under distraction.

It forces one to filter, think flexibly and at speed, in terms of flow versus static positions, and always outside the box (as everyone knows the standard thrusts/parries). Sadly, the former east block players that I used to play with have all passed on now, and their games were always an 'event' - 18 minutes, to win 2 or more games, to the music of Tchaikovsky's 1812 Overture  ;D

 

The 'master's' at this used to insist on fireworks for the cannon, played pissed out of their skulls,

and were the most cunning evil bastards you'd ever want to play.

 

SD

 

 

 

 

 

 

 

 

[netnet]

Think of your career.

For most people - the industry you work in - is the industry in which you got your first full-time job. For the CPA, CFA, lawyer, etc. - it is the industry you went to as soon as you got your designation. Anytime you change jobs, that will be the industry where you are the 'best fit', and where you will get paid most. PROCESS keeps you in the industry swim-lane, and luck chose the industry - it was just where the jobs were at the time. It is the same in investing.

 

To change careers requires ongoing flexibility, significant effort, and ability to absorb loss for an extended period (ask anyone in o/g). An individual might use a MBA/PhD as the change vehicle, an IT manager might use Agile Project Management. A PM has to rely on how often the 'phone rings - today's star value investor being tomorrow's bum. Successful investing requires ongoing mental flexibility, and continuous expansion of circle of competence.

 

Good point.

 

A great antidote is to learn how to simultaneously play chess against 4-5 other players, under distraction.

It forces one to filter, think flexibly and at speed, in terms of flow versus static positions, and always outside the box (as everyone knows the standard thrusts/parries). Sadly, the former east block players that I used to play with have all passed on now, and their games were always an 'event' - 18 minutes, to win 2 or more games, to the music of Tchaikovsky's 1812 Overture  ;D

 

So, on a practical level, what would be the functional equivalence of this?