- Cialdini describes “Fixed Action Patterns” deeply embedded in the human mind. In short, they are:
- Scarcity: The more limited something is, the more people value it – regardless of its true value
- Reciprocation: If someone does us a favor, or gives us something, we feel obligated to reciprocate their generosity somehow
- Social Proof: We tend to mimic the behavior of the crowds around us, especially in the presence of uncertainty
- Liking: It is easier for us to be persuaded by the opinions of those whom we like or find attractive
- Authority: The opinions of anyone viewed as an “authority” carry a lot of weight, even in areas where the authority has no expertise
- Consistency/Commitment: Once we’ve arrived at a conclusion or made a choice, we often stick by it
- Unity: When we identify closely with a given group, we revert to tribalistic behavior and favor those in our group while disfavoring those not in it
- These shortcuts can cause harmful or perverse outcomes however, and this is partly enabled by the information explosion
- E.g., the NFT craze—the Scarcity principle took hold
- The modern world has inundated us with endless streams and unimaginable amounts of information, and it seems as though we cannot handle this without more use of these shortcuts.
- In this way, more information has not led to a more knowledgeable population making wiser decisions. Instead, information overload triggers Fixed Action Patterns and other cognitive biases. The result: the more information available to us, the more we will fall back on shortcuts.
- Munger grouped these biases under the banner “The Psychology of Misjudgment.” A famous 1995 speech that Munger gave at Harvard is a must read for investors.revisit
- As investors, we might do well to learn to recognize and to fear the places where these shortcuts seem to pile up in a cheery consensus, while taking advantage of the rare moments when these shortcuts pile up in a gloomy manner, thereby allowing us to buy great businesses at super cheap levels.
- This is the essence of Ben Graham’s “Mr. Market” analogy, and the information explosion has only made Mr. Market more extreme over the years.