It is almost 2 months since I read a book. Finally after the bhag daud in Mumbai , managed to find time to peacefully sit and read a book. Thanks to Sanjiv Sir’s awesome book collection, managed to get my hands on “SWAY”. The first time I came across a mention about this book was when a trader recounted his experience about a Variance swap trade and related his behavior to that explained in the book “SWAY”.
Well, tons of books have been written after the explosive growth of behavioral economics. “Does this book offer anything new to me”, was my feeling when I began reading.
Loss aversion : KLM disaster mentioned is a case of loss aversion where dangerous decisions are made to avert losses !! . The possibility of a potential loss makes you avoid that loss at any cost…Sometimes it is too costly as it the case with KLM airline where the pilot had a potential loss of reputation at stake that lead to one of the most ghastly flight accidents in the airline history.
Commitment Sway : $1 auction at Harvard is an example of commitment where a strange type of auction brings about the irrational tendencies in perfectly rational people. This is similar to, well, I have already committed so much of time and effort towards this..Let me go about it doing the same thing….It happens in startups, relationships, companies, everywhere…Sometimes, it is difficult to say QUIT, even though it is an rational thing to do. Reminds me of “DIP” from Seth Godin…Its a wonderful book that makes your mind flexible and forces to take some tough decisions.
Value attribution : We assign value to things unknowingly and we make decisions based on the value attribution with out rechecking our assumptions that lead to ascribing the value.
Diagnosis Error :
The take away from this is : When we are in a position to make a diagnosis, we all become overly confident in our predictive abilities and overly optimistic about the future. For a number cruncher, this is probably the most important thing to keep in mind. If you see some pattern, back test it rigorously, have a healthy skepticism for whatever you are seeing.
Fair value is something most of the traders think day in day out. Is it priced at fair value ? Umpteen examples in this book show that pure objectivist fair value assessment is not the norm of the day. One of the interesting examples quoted is that of the popular TV show, “Who wants to be a millionaire”. Audience poll is something which the contestant uses when he/she doesn’t know the answer thinking that the audience will help him/her out. In some specific countries it has been found that audience deliberately misleads the person who is playing!! Fair value reasoning is used to explain this behavior
Compensation and Cocaine:
There is an interesting chapter on influence on incentives. Performance incentives and its effect on productivity is always something that is paradoxical to me. If you give me a differential equation and ask it to solve, i might work on it for hours and solve it to just to get kicked about the fact that I am able to crack it. However if you attach $X to it and ask me to solve, somehow I start reacting to the same situation differently. I become less motivated. I have read at innumerable places about a similar behavior , though in different contexts. An activity which is done to derive pure pleasure out of it, seems different where monetary incentives are attached to it. I remember a friend of mine who loved writing and he decided to join a media firm . Soon enough, he was demotivated and left the media firm. By attaching a $X to his writing, probably he felt less motivated to write any more and was forced to think about deadlines!.
This type of issue always makes me think of wallstreet people, traders etc who , atleast as the media portrays are motivated by monetary incentives. So, “Is beating the market that gives them thrill” OR the result of beating the market,money, is what drives them is something I do not know. At least the world portrays that year end bonus is all traders look for…If that is the case, they are not there to beat the market for the sake for it, but purely money driven. Incentive structure, especially monetary is wild animal. For some people, it motivates to do better, For some people , it actually demotivates. To this day, I have never really understood the reason.
Coming back to the contents of this chapter, the authors say that there are 2 distinct centers in our brain. One area is related to addictive substances like monetary incentives, cocaine, drugs and other area which is altruistically inclined. Book quotes research evidence that the pleasure center hijacks altruistic center and changes the behavior of the person completely. Well, I know one friend of mine who is working towards building a great firm and ultimate wants to make tons of money. However when asked the reason for doing the same, he says the drive is purely based out of altruistic reasons. The evidence in the book at least says that it is generally the addictive center which will have a major say in how one goes about in life. So, whenever you hear the words, ” I want to make money so that I can donate them later “, you got to read this chapter from the book to convince yourself that it is actually the pleasure center that has hijacked the person’s mind and altruistic center is somewhere in the back ground.
Subroto Bagchi, in his book, High performance entrepreneur , also echoes the same sentiment. An entrepreneur has to be financially driven and he invokes an Indian mythology argument saying that Money is Goddess Laxmi and she runs from you at the slightest instance of disrespect or apathy. Well, if you pitch this argument to any Indian, mostly they are going to buy it 🙂 .Anyways the point is I guess, one needs to be clear on these 2 aspects and make decisions accordingly in various situations.
Book is extremely light read and will make you ponder atleast a few things , considering that there are tons of examples cited. For a time strapped reader, the synopsis at the end of the book should more than suffice. I have “Nudge” , a book echoing similar sentiments is far more engrossing.Will read it someday.