“The elementary part of psychology—the psychology of misjudgment, as I call it—is a terribly important thing to learn. There are about 20 little principles. And they interact, so it gets slightly complicated. But the guts of it is unbelievably important.”
— Charlie Munger in a speech to the USC Business School in 1994.
Charlie Munger has long been a strong advocate of viewing the world through a multi-disciplinary mindset. Many readers are familiar with Poor Charlie’s Almanack which is the best way to get acquainted with Mr. Munger’s life and philosophy. On a number of occasions, Mr. Munger has recommended that those who wish to become more familiar with psychology should read the work of Robert Cialdini. Dr. Cialdini is best known for Influence: The Psychology of Persuasion, a landmark book that has become standard reading for marketing professionals in recent decades. Mr. Munger has been known to give copies of this book to friends and relatives and felt so strongly about the value the book has brought to the world that he gave Dr. Cialdini a gift of one Berkshire Class A share in appreciation.
The attraction of Influence for Charlie Munger was not primarily related to applying the techniques in a marketing setting. Instead, Mr. Munger valued the book because it provided deep insights into the psychology of human misjudgment. One of the very first articles to ever appear on The Rational Walk applied a few of Dr. Cialdini’s insights to the mystery of how Bernard Madoff was somehow able to use his weapons of influence to steal money from so many intelligent people for many decades.
In Dr. Cialdini’s new book, Pre-Suasion: A Revolutionary Way to Influence and Persuade, a key insight is provided that could change how marketing professionals approach persuasion. Dr. Cialdini reveals that the major factor that separates extraordinary persuaders from average ones involves the key moment before a message is delivered. By setting up a “privileged moment” prior to delivering a message, a persuader can materially increase the odds of a positive outcome. What is a “privileged moment”? Dr. Cialdini describes an approach called channeled attention that does not require the persuader to actually alter a person’s beliefs but only to alter what is prominent in a person’s mind at the time they are making a decision. This is a major departure from the traditional view that it is necessary to change a person’s beliefs by persuading them regarding the merits of a proposal. Instead, one must only pre-suade through channeled attention.
Human beings typically assume that whatever we are focusing on at a given moment deserves heightened attention. Dr. Cialdini contends that the human mind can only really hold one thing in conscious awareness at any given point in time and that the cost of that heightened attention is a momentary loss of focused attention on everything else. One striking example in the book involves a study of consumers who were in the market for a new sofa and were reviewing choices online. Prior to viewing the sofas, individuals were either shown a background of fluffy white clouds or images of pennies. Controlling for other factors, the individuals who were subliminally led to focus on clouds placed a higher priority on comfort while those who saw the pennies were more concerned with price.
The implications of this basic thesis are both fascinating and terrifying. The individuals involved in the sofa study refused to believe that the background images of clouds or pennies had any influence whatsoever but their behavior said otherwise. Essentially, persuaders – whether they are salespeople, politicians, or journalists – have the power to dramatically influence the actions of their targets merely by directing people’s attention toward what they want them to think about. These techniques have also been used by police interrogators to persuade individuals to confess to crimes that they did not commit typically leading to convictions even when the individuals later renounce the false confession.
Assuming we buy into the primary thesis of “pre-suasion” via focused attention and channeling, the question naturally flows to the nuts and bolts of how one might command attention and direct it toward the desired objective. Once the attention has been directed to the right place, it must be held there for long enough to produce the desired decision. Dr. Cialdini provides a number of guidelines and potential roadmaps to follow. As one reads through these concepts, it is tempting to think of these techniques as ones that would only work on “other people” – we cannot believe that we are subject to such persuasive techniques but, of course, almost all of us are!
What does this have to do with investing? Well, perhaps it has a great deal to do with it when we look at our research process objectively. Although Dr. Cialdini does not discuss the influence CEOs have on shareholders, surely the same principles of pre-suasion apply. CEOs can focus our attention to certain facts and figures or even use subliminal suggestions in presentations to get us to focus on certain metrics while overlooking others. For this reason, it seems prudent to immunize ourselves against this risk by avoiding any contact with management prior to an objective review of documents that are more fact based.
Although investors will vary in their research process, ideas typically flow from many initial sources – newspapers, magazines, blogs, newsletters, and more. What is the first step one should take when investigating further? Should we dive into the 10-K directly or perhaps review the latest quarterly conference call and slide deck? Which would be less of a mental challenge? Well, obviously it would be a lot easier to listen to the conference call while flipping through a slide deck. However, by doing so, we are allowing management to pre-suade us! The material that is presented, the order in which it is presented, and even the subtle hints in the presenter’s language can all have an influence on us whether we accept it or not.
How about skipping the presentations but diving right into an annual report? That’s probably not a great idea if management provides a glossy annual report with a lot of marketing material in it. It seems much more prudent to focus on the 10-K. Obviously, even a 10-K can pre-suade us in various ways based on how the company is described and the areas that are emphasized, but we probably stand a better chance of remaining objective if we are in a text based format without visual imagery to exert any influence. Then, by documenting what we, as investors, view to be the critical factors, it will be possible to resist potential attempts at redirecting our attention when we later review the conference calls, presentations, and glossy annual reports.
The applicability of Dr. Cialdini’s insights are endless and span multiple disciplines. This is no doubt why Mr. Munger has given away so many copies of Influence over the years and felt strongly enough to give Dr. Cialdini one Berkshire Class A share to thank him. There is some evidence that the influence has gone in both directions. Dr. Cialdini thanks Mr. Munger for reviewing the manuscript prior to publication and there are several pages describing how Warren Buffett uses the concept of unity as a persuasive tool that has contributed to the unique loyalty Berkshire shareholders feel toward management.
Readers may wonder whether they should read Influence before Pre-Suasion. It seems like doing so will increase comprehension of the topics discussed in the new book although each book can stand alone in terms of providing value. It should be noted that both books come with extensive end notes. In Pre-Suasion in particular, it is important to read the end notes along with the text. In some cases, quite a bit would be lost without consulting the notes.
Click on these links to purchase a copy of Influence: The Psychology of Persuasion and Pre-Suasion: A Revolutionary Way to Influence and Persuade. Dr. Cialdini refers to Daniel Kahneman’s book, Thinking, Fast and Slow, which is an excellent resource for those who are interested in a more extensive tour of the mind.
Disclosure: The Rational Walk LLC was not provided with a review copy of Pre-Suasion and purchased a copy of the book.