Simple Association tendency.

Peter Bevelin wrote that we were born with some preferences. We try to seek some pleasant stimuli, get close to things that make us happy, and stay away from painful things.

For this, Peter Bevelin shared an example: the supplier took a customer named John to the city's best steakhouse for dinner and then paid for it. As a result, the supplier left a positive impression on John. Whenever he purchases new supplies, John chooses this supplier. This shows that humans really act based on their emotions and feelings, rather than relying on cold facts and logic.

Bevelin further explained that people can influence our style of handling things by linking products, services, people, investments, or other situations to things we like. Many times, we buy products or make investments simply because we associate them with positive things.

No wonder advertisers or politicians link what they want to express with things we like, and avoid associating themselves with negative events. This also explains why companies and politicians try to describe their competitors with negative words, and then guide people to associate their rivals with things they don't like.

As investors, we must remember this principle. Just as many investment managers are good at promoting their attractiveness and ability. Even if you like this investment manager or the management team of a certain company, it does not mean that we should invest in them or blindly adopt their investment advice.

Bevelin also pointed out that people usually don't like to deliver bad news. If someone is a messenger of bad news, people often have a negative view of him. For example, in Antigone, a messenger is worried about his life safety because he knows the king will be dissatisfied with the bad news he brings. Buffett said about delivering bad news that those who work with him should think and disclose bad news in a timely manner. Because people like Buffett are the least likely to see bad news covered up, because it may cause him greater losses.

Bevelin's technique he shared is to fight against this misjudgment influenced by simple association by doing a comprehensive evaluation. Linking some stimuli to pain or pleasure does not mean that the stimulus will cause the same pain or pleasure in the future. Therefore, people should be encouraged to tell you bad news immediately. Individuals have no good or bad, just because we associate them with positive or negative things.

In addition, people's views on things will change depending on the way things are constructed.

For example, the feeling of showing a label of 95% fat-free is very different from showing a label of 5% fat; a surgical success rate of 40% is considered much better than a surgical failure rate of 60%; people treasure a thousand dollars earned through hard work more than one thousand dollars won from a casino or scratch card. Although the spending methods of these two thousand dollars are exactly the same, our views are very different. Bevelin believes that we should look at our assets from a holistic perspective. One dollar is one dollar, no matter how it is obtained.

If you invest time and money in something, you will think whether the investment should have a return. In a sense, life is like a poker game. Even if you have a good hand, you must learn to choose to quit at the right time. People need to learn to make fewer mistakes than others, and how to correct mistakes faster when making mistakes. One method is rationality, which solves problems by evaluating real interests, probabilities, etc. Another way to solve it is to evaluate the subconscious psychological factors. Finally, Munger suggested using a checklist, reviewing the major models in psychology, and then considering the comprehensive effects of all things and how to work in specific situations. Ultimately, people need to remember that thinking and rationality are higher than action and emotion in investment.

Reward and punishment are super-reactive.

Peter Bevelin quoted a sentence from Charlie Munger in the book: "Nature's iron law is that you plant the crop you get the crop. If you want ants to come, you will put sugar on the floor. Therefore, what we need to do is seek things that are beneficial to us and avoid things that are punished." Thus, he introduced the psychological misjudgment of the "reward and punishment" type. We learn what is right and what is wrong from the consequences of our own behavior. Therefore, beneficial or pleasant behaviors are often repeated. Once these behaviors are reinforced, they will solidify, become stronger over time, and then become a habit.

English writer Samuel Johnson said: "The power of the chain of habits is weak, so it is often imperceptible, but once it is felt, it is indestructible." For this, he shared a story about the New York Police Department told by Charlie Munger.

At that time, the amount of pension was based on people's salary levels in the last year of work. So, in the last year of work, some police officers cooperated with each other and tried to falsify working hours and wages, such as setting overtime hours to one thousand hours in the last year, to maximize their last year's salary. Absolutely no one would be ashamed of such plans, because they all hoped to benefit from the plan. Munger said that they soon felt entitled to do so. Everyone has done this before, and now everyone is doing it, so they will continue to do so.

Bevelin believes that this is also closely related to investments. When people start making money through investments, they think they are geniuses and become overly optimistic adventurers. Then, when they see some failures or begin to lose money in stocks, they become too pessimistic and averse to risk. People tend to overreact to recent experiences, just like children who won't take risks to touch a potentially hot stove again. For example, retail investors who lost a lot of money in biotech stocks are unlikely to buy another biotech stock in the future because they have this negative association. It is also equally important to note that good results do not necessarily mean that we have made good decisions, and bad outcomes do not necessarily mean that we have made bad decisions.

If you are a manager, a leader, or a parent who wants to encourage good behavior and discourage bad behavior, Bevelin suggests that you should break up pleasant experiences into several parts and painful experiences should not be broken up into several parts. For example:

Have you ever attended a birthday party where children's gifts are wrapped in many different boxes? Giving rewards usually makes people feel better. The feeling of receiving 50 dollars twice is better than receiving 100 dollars once; the feeling of losing 100 dollars once is better than losing 50 dollars twice.

Likewise, we prefer a series of experiences that improve over time. There are many things Bevelin reminds us of regard to the psychology of reward and punishment. He said that praise is more effective at changing behavior than punishment, and encouraging right things is better than criticizing wrong things. Secondly, we should link incentive measures to performance and the desired results to ensure that they are aware of their own performance. Typically, bad behavior should come at a high cost.

When company managers consider executive compensation, they can aim to create a company that maximizes long-term shareholder value. Therefore, executives who own a lot of stock and have worked for many years are motivated to think long-term. Although a manager's compensation is mainly dependent on short-term price appreciation and appreciation of stock options, they are motivated to drive short-term performance. Bevelin also suggests that incentive measures should be based on individual performance rather than solely on the time spent by a person in the organization. When a company adopts a structured or hierarchical system, employee promotion depends only on their work experience at the company, which will severely undermine their work enthusiasm.

In addition, do not let money be the only motivator, as rewards themselves can change employee behavior. When employees achieve something, we praise them to increase their motivation. But if the reward money is the only way to encourage employees, it is bound to make employees feel deeply controlled.

Self-interest and incentive bias

Bryce Pasca said, "Usually, we are more likely to believe the reasons we discover ourselves than the reasons others tell us."

Bevelin once shared a story. The organizer of a tennis tournament needed funds, so they contacted the CEO of Transcorp and asked him to sponsor the tournament. The CEO asked how much money the tournament needed, and the organizer replied, "1 million dollars." The CEO said, "No, that's too much money." Then, the organizer replied, "Not only can you participate in a game, sit in the honorary seat, but also stand next to the presidential family member and present awards." Isn't that great? The CEO agreed readily.

Obviously, people always do what is best for themselves. The classic saying goes that you should never ask a barber if you need a haircut. Everyone, including lawyers, accountants, doctors, real estate brokers, consultants, salespeople, media and so on, will have biases because of their motivations that are favorable to themselves.

However, what is beneficial to others may not be beneficial to oneself. Brokerage consultants are usually "salespeople" who may persuade you to buy something that you don't really need, which is very common in the financial services industry. It is also worth mentioning Wall Street's "incentives." Wall Street wants you to take action and continue to trade because they earn spreads and transaction fees from your continuous trading. When you participate in overpriced or excessively hyped new hot IPOs priced by investment bankers, they will get high commissions. Therefore, if you want to change someone's behavior, you can try to change their motivation first.

Benjamin Franklin said that when persuading others, discuss benefits rather than reasons. It may not be wise to tell someone directly what they should do because most people will act according to their own will. Warren Buffett also said that he hopes each subsidiary manager will operate their own business in the manner they believe is most appropriate. I will never tell the subsidiary manager which supplier to use or other similar things. Overall, the key point is that we need to always consider the interests and interests of others and change their motivation accordingly.

Tendency to overconfidence

Most people naturally think they are special. They believe that bad things that happen to others will not happen to themselves. Bevelin writes that most of us believe that we will perform better, be more honest, smarter, have a better future, a happier marriage, and be less likely to be hurt than the average person. But in fact, we often overestimate our abilities. People tend to put higher probabilities on expected events. Optimism is good, but being a little more realistic when making important decisions is better.

Related to this, investors tend to attribute returns in investments to their own skills and losses in investments to bad luck. Experiments have shown that when successful, most people attribute it to their outstanding ability. However, we do need to be aware of our own arrogance and realize that overconfidence can lead to unrealistic expectations and make us prone to making poor investment decisions. Bevelin writes that everyone should recognize their limits. Don't let your "self" decide what to do, but be aware of your shortcomings and potential problems, establish safety margins, and develop action plans in a timely manner when things deteriorate.

Due to people's overconfidence, they may be more easily deceived. Richard Feynman once said that the primary principle is that you cannot deceive yourself, but you are the easiest person to deceive. Beverlin wrote that we deny and distort reality in order to feel better, especially when reality threatens our own interests. Austrian psychologist Sigmund Freud once said that belief in illusions is because it can relieve our pain and let us enjoy happiness.

On the contrary, if we deny and distort many pieces of information that do not conform to our own ideas, and deny unpleasant news, we are unlikely to become great investors, because the world we see is not real. Refusing to admit flaws does not make these things disappear, and the truly bad news is more worth listening to than good news.

Imagine thinking about the world in a very simple causal way. If X happens, then Y will happen. For example, if interest rates drop, then stocks will rise. However, the world, especially the market economy, is never as simple as we hope. In fact, there are many factors that affect the development of things, and we may not be able to reduce them to only one variable. This reminds people to always remain humble and not to be overconfident, no one can predict what will happen in the future.

Oscar Wilde once said that the public has an insatiable curiosity about everything. Beverlin wrote that we don't like uncertainty and meaninglessness. But it is important for people to accept the fact that the world is fundamentally uncertain. When people are most afraid and uncertainty is at its highest, it may be the best investment opportunity. Most people want to wait for the storm to pass and wait for the future to become clearer. By then, the opportunity for quality investment has passed.

Reciprocity

Nothing is more indispensable than returning kindness than return. No one will believe an ungrateful person. Imagine that when someone does something very friendly to us, we feel that we owe that person's kindness. Therefore, we tend to repay others in the same way for everything they have done for us. I believe that people are born to give and don't expect any return. After a long period of paying, they may find that they have received a return of 10 times value in some way.

In his book "The Pleasure o Compounding," Gattem talked about "kindly connections."Gattem has established good relationships with the people he worked with. When these people need help in the future, Kattam will also lend a helping hand. By chance, someone who had interacted with Gattem in the past warned him that something unknown had happened within the company. Therefore, before the company's economic situation became turbulent, Kattam sold the company's stocks. It was only because of Kattam's kindness that someone gave him a warning to avoid losses.

It is evident that whether others are kind to us depends on how we treat them. Beverlin also talked about Warren Buffett's style of dealing with things. At Berkshire Hathaway, about three-quarters of the managers are financially independent. They don't have to work for Berkshire Hathaway, but they still choose to do so. Because Buffett never interferes with the work of these managers, but lets them have ownership of their work, so they will feel respected and no one is monitoring their every move, let alone criticizing them later. Instead, they control everything themselves. Therefore, they appreciate Buffett's style of dealing with things and will work harder to make great things happen to repay Buffett.

In addition, Beverlin also emphasized that people do not want to feel guilty in their hearts. If we do not allow others to reciprocate us, we will be disliked. Therefore, if you have helped others in a certain kind way, you should also generously accept others' return in the future. When the return is presented in a personalized or unexpected way, it is the most effective and fascinating. If someone returns something completely unexpected to you, then that person is sure to leave a deep impression on you.

Admiration of authority and group identity tendency

Many investors, including myself, will somehow learn from the buying behavior of other well-known investors. When we see a deeply respected investor buying a large amount of stock, out of trust in them, we may follow the trend to buy without doing a lot of research. Of course, this may not be a problem for us, but in some cases, it may also cause us trouble.

Authority bias is common when advertisers use celebrities to endorse their products. For example, Nike's success has been partly dependent on its collaboration with top athletes such as Michael Jordan and Tiger Woods.

In investing, we always face uncertainty about the future, so we turn to so-called investment experts. If someone does not understand the details of investment, they may casually believe the opinions of some "experts" and prompt them to buy some inconspicuous financial products. It can be seen that some people regard other people's views as authoritative only because the other person's views sound good, and this worship of authority can lead to behavioral errors.

American philosopher Eric Fair said that when people are free to do what they want, they usually imitate each other. People tend to believe what others believe and do what others do. If others avoid something, we are also more likely to avoid it. If others approve of a product and show love for it, we are more likely to follow suit and buy the product.

In addition, in order to gain group identity, most managers choose to use stable management methods and avoid making unconventional decisions, because this makes them stand out or even stupid. In this trend, there will be very unreasonable things in the economic market. Buffett once said that as often happens on Wall Street, there are always fools who follow investment trends. When we see a group of people doing something, we are more likely to imitate them. Even if the investment outlook is incredibly good, or the numbers are completely irrelevant or meaningless, people still follow suit without hesitation. This is the reason why Bernie Madoff has been able to make high returns year after year, even though his so-called investment strategy is impossible to achieve.

When people become rich by doing something irrational, they don't care about the internal logic, let alone making decisions after careful consideration. When most people in a group are doing the same thing, we are likely to do the same thing, which can cause us to become overly confident because we believe that the choices of most people must be correct.

Buffett said that we will not find comfort in important people, outspoken people, or a large number of people who agree with our views. Benjamin Graham once said that you have the courage to use your knowledge and experience to draw conclusions from the facts. As long as you are confident that your judgment is correct, take action, regardless of whether others hesitate or hold different opinions. Nowadays, with the proliferation of social media, it is easy to fall into group thinking, which will only limit your imagination and ultimately obliterate your own individuality. For example, social media algorithms may recognize your user portrait and push some content that is slightly related to your views and interests to you. In this way, your thinking will gradually solidify, and it will be difficult to view things from multiple dimensions.

Edited by Jeffrey