Motley Fool Hidden Gems Investing - Motley Fool Money: 04.22.2011

Episode Date: April 20, 2011

Our analysts step back from the week's news and share some timeless investing truths.  Author Peter Sims offers some big insights from his book, Little Bets: How Breakthrough Ideas Emerge from Small Discoveries.   Christopher Chabris talks invisible gorillas, intuition, and investing.  And Dan Ariely talks about predictable irrationality. Learn more about your ad choices. Visit megaphone.fm/adchoices

Everybody needs money. That's why they call it money. The best things in life are free. But you can give them to the birds and bees. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and I'm joined by Motley Fool Senior Analysts Seth Jason, James Early, and Ron Gross. Guys, good to see you. Hey, Chris. We've got a special show this week. It's our Easter special, our spring break special, our let's just treat ourselves to a few days off special.

So this week we're going to take a step back from the week's business news. We'll be talking with Peter Sims, author of the new book Little Bets, How Breakthrough Ideas Emerge from Small Discoveries. And we will also dip into the archives with a couple of classic Motley Fool money interviews. But guys, I want to kick things off this week by talking about some investing truths, some timeless investing truths, because the fact is that you guys don't just do this show every week. You actually have real day jobs here at The Motley Fool running different services. Seth, I'll start with you.

You run Hidden Gems, which is our small cap service. And you recently wrote a piece that you kicked off with the question, what do Gandalf, Sean the sheep and low-risk stocks that deliver huge returns have in common? And the answer? Unfortunately, they're all fictional. Gandalf, the wizard from Tolkien's books, be so cool if he were real. Shaun the sheep, the little claymation sheep from England, I would love to have him hanging out in my yard. Low-risk stocks deliver high returns, completely fictional. No such thing? No such thing. And this is something investors have to be reminded of all of the time.

If there were no risk in a stock, the price would automatically rise to the point, you know, to what that company is worth in the future minus, you know, the time value money difference that you get. The reason you can get excess returns, especially in small caps, it's not because you have more smarts than the next person, a better financial model. It's nothing like that. It's that you have the guts, I guess, is the way to look at it. The polite term? The polite term. to buy when other people are really, really afraid. And I was discussing this in terms of a stock I discussed here on the radio show called Enernoc. There was some news that everybody

assumed meant really horrible things. They assumed it meant an accounting scandal. They took it completely the wrong way. The market flipped out and it meant none of those things. And so it provided, I think, people with a great chance to buy the stock at a discount to reality. And it still hasn't actually gone up from there, but this is one of those places where you make your money not by knowing more, but by thinking harder. So if it hasn't gone up, this lesson could actually still end up badly? Well, it could if the business doesn't work out. Yeah, but it wouldn't be because of the thing that people thought it was. They thought that this was a scandal and that there was accounting and it would just be because the business idea doesn't work. Ron? I think it's

important when investors think about risk, very important, don't think about it in terms of the movement of stock prices on a daily, weekly, even monthly basis. Think about risk in terms of an impairment to the company's business model or to the fact that you could permanently lose capital in an investment. Let the volatility of stock prices just take care of themselves. Don't focus on that. Yeah, the volatility, that's your friend, actually. James? Yeah, risk needs to be matched to the time horizon of your investment. Researchers typically use daily or monthly volatility as a proxy for risk. But that's the only risk if you're investing with a daily or monthly horizon. If you have a five-year horizon, then in theory, volatility over five years is the risk you need

to be concerned about. And like Ron said, that's much more affected by the business model and not by market psychology. James, you run our income investor service. You recently wrote that behavioral economists think investors are dumb. And your point was, we're not dumb. We just make dumb mistakes. And to illustrate your point, you reference a tribe deep in the jungles of Brazil. Take it from there. Sure, yeah. Well, we all are dumb sometimes, but this tribe in Brazil is called the Paraha tribe. Interestingly, they have no numbers, no history, no words for future or time. They basically live in the moment. They freely trade sex for goods and services. It's just part of their philosophy. And how do you get there? I actually don't know. The key point, though,

is that some researcher went down there and spent eight months trying to teach them to count from one to ten. You would think that would be obvious, but these guys still couldn't get it. He said they didn't seem to be really slow otherwise, but they just couldn't get it. And what this has disproved is the hypothesis that we all think the same regardless of language. We know language shapes our ability to express thoughts, but finding the Paraha tribe has made researchers think that language actually affects our ability to have thoughts in the first place, which is very interesting. And it relates to how we're hardwired to invest or actually not to invest. We're very emotional. We're wired to enjoy things like wrestling and football. But investing is a very

calculated process. It's not a deterministic science. In other words, you touch a cactus, it's always prickly. If a stock goes up in the past, it doesn't mean it's going to keep going up. In fact, there's probably a good chance to just go back down. So if you're listening to this wondering what a takeaway might be, it would basically be to think of a plan before you invest. Write that plan down. Write why you're buying down. Write what's going to make you sell down before the emotions get into play. Don't check your stocks too frequently. That's going to play against your psychology. And simply put, follow that plan. And make listening to Motley Fool Money part of that plan.

That's definitely part of anyone's plan, Chris. That's a no-brainer. Ron? Yeah, and I'll just add that the irrationality of humans are actually what make it possible for folks like us to beat the market. If investors were rational all the time, the market would actually be much more efficient than it currently is, and it would make it more difficult to beat the market, which is kind of what we do here on a daily basis, or at least we attempt to do. Ron, you run our Million Dollar Portfolio service. You recently wrote a piece entitled

The Five Truths About Valuation. We talk about a lot of businesses on this show, but it's not just a matter of whether we like Google or Apple or Microsoft or whatever. It's also a matter of the price that we're paying. So, I'm going to bring our man Steve Broido in here to present. We're not going to go through all five, Ron. Sorry, I know you were excited. No, it's good. You have to subscribe for that, folks. Plus, we don't have that kind of time. But Steve, if you could spot us up with one of Ron's valuation truths. Absolutely. Ron Gross, valuation truth number one. A company is worth the amount of free cash flow that it can generate over its entire

life, not a penny more or a penny less. Couldn't have said it better. So, I'm very valuation focused. I always try to buy companies when I consider them to be cheap. I sell them when I consider them to be expensive. And to me, valuation is defined as the amount of money a company makes over its life. And when we say free cash flow, we really mean the amount of cash an owner of a company could put in his pocket at the end of a given period of time, after they pay taxes and interest on their debt and invest in the business, the actual amount of cash. So, in a very simple example, let's say I owned a candy store, and for some weird reason, the candy store was only going to be around for a year. And

had a crystal ball and you knew it would make $100,000 over the course of that year. Well, how much would you pay me for that candy store? Would you pay me $200,000 for that candy store? That would be irrational. You'd be actually locking in a loss. If it were named Zipcar or something, I'd pay you a million times that amount. You probably wouldn't even actually pay me $100,000 because you might as well just keep your money. So you want to pay less than $100,000. And it doesn't matter whether it's public or private. That's what we try to do, or at least I try to do all day long, is find companies that are selling for less than the present value of all their future cash flow streams.

Anyone want to disagree with that? Feel free to take a shot at Ron. No, I mean, that really is the theory of what all of these companies are worth. And I have to agree that that's actually what they're worth, if we use the word worth. Worth strongly, that's what they're worth. But what the market thinks they're worth at any given moment varies wildly. And And that's where the whole trick in investing comes is because the market will bid these companies up based on what it believes those free cash flows are going to be sometime in the future, even if those dreams are completely irrational. And the reason it does that is sometimes those irrational dreams actually come true. A company like Altria or Philip Morris that it was, which just grew free cash flow, it's just over and over and over again, just multiplying and multiplying it. And Microsoft, other companies doing the same thing.

That's the dream. So people will pay far more for a company at many times than it's actually worth. And the inverse of that is that the market, when they don't like a company, will often pay far less than what the free cash flows would suggest. And the real difficulty here is one of the other truths is actually that there are no crystal balls. We really don't know with any certainty what the future cash flow of a company is going to look like. So, our job is to get in the ballpark as close as we possibly can to at least have a framework in which we can think about value. Okay. Seth Jason, James Early, Ron Gross. Guys, thanks for being here. Thank you, Chris. Coming up, what do Jeff Bezos, Chris Rock, and Thomas Edison have in common?

The answer, right after this. This is Motley Fool Money. Money. Welcome back to Motley Fool Money. I'm Chris Hill. So what do Thomas Edison, Chris Rock, and Jeff Bezos have in common? Peter Sims is the author of Little Bets, How Breakthrough Ideas Emerge from Small Discoveries. Peter, welcome to Motley Fool Money. Hey, Chris. Great to be here.

So what do Edison, Chris Rock, and Jeff Bezos have in common? Well, they all make what I call little bets to discover what to do. So take Chris Rock. When he's developing a new comedy routine, he doesn't appear on HBO or on Letterman with having the ideas fully baked. He'd spend six months to a year going night after night to small comedy clubs, scribbling lots of ideas down, making thousands of little bets on ideas that will either make it or not. Most of them fail, but he learns through this process to discover what's going to be the killer routine.

And, you know, Edison used a very similar experimental approach as does Jeff Bezos. So is, I mean, is that the big, in some ways, misconception about business or Silicon Valley that, you know, that you have to have a brilliant idea to start with? I think it's a huge misconception, yeah. I mean, instantaneous ideas are completely overrated. I mean, if you look at the research on this, University of Chicago professor David Galenson says, yeah, sure, there are people like Mozart who come up with ideas on, you know, pretty much on a whim, but most of the time, people have to toil and struggle, as Chris Rock does,

or as, you know, if you look at companies like Hewlett-Packard and Silicon Valley, try 100 ideas for every six that they would project to be breakthroughs, if you look at how Bill Hewlett, co-founder, thought of it. So, yeah, I mean, it just takes a lot of experimentation, a lot of learning, and a lot of hardship and toil to get to the breakthroughs. You're listening to Motley Fool Money, talking with Peter Sims, author of the new book, Little Bets, How Breakthrough Ideas Emerge from Small Discoveries. Peter, let me spot you up with a couple of company names, and if you could elaborate on the way that they have used little bets to get where they are today.

And let's start with one of my favorite companies, and certainly one of my kids' favorite companies, Pixar. Pixar, right. Well, actually, Pixar is an interesting story. It started out as a computer hardware company. Steve Jobs bought it in the mid-1980s, and he thought it was going to be a great computer hardware company. But they were just never able to get that technology to sell. And, you know, on the side they made little bets on short films

that were showing the value of the hardware. Ultimately, it just became so good at making these short films that Disney approached them and said, hey, would you like to make a full-length feature movie? And that was Toy Story, you know, the first digital film. And the company obviously took off as a film company from there. So they make little bets every day in that company, whether it's to create stories or to put movies together or just to kind of learn where they can improve. And so it's just a very experimental mindset that they have.

Yeah, I read that one of the co-founders at Pixar eloquently describes the creative process as, quote, going from suck to non-suck. That's right. Yeah, that's Ed Catmull, the Pixar co-founder. And he says that when they start working on a movie, every time they show the first draft of it, if you will, it sucks. They show it to people inside the company and they say, this is terrible. But they get all that feedback. They figure out where the key problems are, like where the plot needs to be changed or where they need to take out scenes or where it's just not compelling.

And then they go back and rework it, and they keep doing this over and over and over again until towards the very end it starts to go from suck to non-suck. but the directors there will say that the movie pretty much sucks until right at the end of the process. And John Lasseter, who's the chief creative officer there, will say, we don't actually finish films, we just release them. Right, so the movies suck right up until the point where they win an Academy Award?

They're still fixing problems. They'll have that one twist in the plot that just isn't working with viewers. And they'll even bring kids in to watch the movies right before they're released. And if the kids aren't laughing at a scene or if they're confused, they'll know that's a real indicator for how the rest of the audience is going to respond. So they'll have to pull out even backstories right towards the end, right up to the release date.

It's a pretty amazing process. Another company that has succeeded by making little bets is Google. Yep, absolutely. I mean, Google's always, they have the luxury of being able to test lots and lots of ideas with a small portion of their audience. They might call it the 1% test where you might see a new experiment they're doing without even knowing it, but they're always gathering information. So a very experimental mindset because it's a web company, so they have a luxury there.

You're listening to Motley Fool Money. My guest is Peter Sims, author of Little Bets, How Breakthrough Ideas Emerge from Small Discoveries. One of your chapters is entitled Failing Quickly to Learn Fast. How do the companies that are successful in placing little bets deal with failure? Well, I think it comes down to, are you an experimental culture? So at Amazon, a company that I think does it very well, people are evaluated based on how often they experiment. But at companies like Procter & Gamble, where it's just not natural to be doing anything that's not kind of in keeping with the core brand identity and any risk, it's much harder. So for P&G, they've tried to take a lot more little bets.

A.G. Lafley tried to incorporate that more into the culture, but it's a very slow-turning ship to get out of a really risk-averse mindset. So, you know, the companies that do it well tend to be more entrepreneurial, I think, at their core and maybe less centrally focused. And just, you know, Hewlett-Packard grew 18% a year for 60 years, very decentralized organization. Google, Again, a very decentralized organization allows for a lot of that experimentation. The same would be said of Pixar, not a centralized command and control organization. So those tend to be the organizations that have an easier time with it. You live out in Silicon Valley.

What is something in the world of technology that isn't really on many people's radar that you think has got some strong potential? That's a great question. I think one of the things I'm intrigued by is just people who are taking data and who are mapping that data and visualizing that data in ways that's very valuable for companies and for organizations. And so there's just several companies that are startups that are just using these algorithms to basically sort through all this data. And we have so much information now that you can just see them being able to, you know, monetize that in interesting ways going forward. All right, Peter, we will wrap up with a round of buy, sell, or hold. Awesome. Let's start with the newest version of this device is now featuring built-in ads.

Buy, sell, or hold Amazon's Kindle. I would say hold. You think they've made a mistake? No, I don't think they've made a mistake on the built-in ads, but I think the pricing is at a level now where we're going to see if this is the right price point for it. And, you know, the next chapter of Kindle is still kind of in the making, I think. It's going to be interesting to see if they can get the content players on board. It's got an upcoming IPO, buy, sell, or hold the online music site Pandora.

I think Pandora is a buy. I mean, they have such great penetration on mobile devices, and I think they've just begun figuring out how to monetize. I think it's a really, really impressive company, really well-run company. In fact, it's probably one of the best-run companies I can think of in this area. And finally, a New York City mother recently sued her daughter's preschool for being, quote, a big playroom. Buy, sell, or hold the value of play. Big buy. Big buy. You look at the research, the neuroscientists say, hey, if the kids play when

they're young, they're going to be more likely to develop all the right skills. So I'm long on play. Is that another thing that some of the companies you've written about have in common, sort of fostering, if not play at the office, certainly aspects of play in the work that they do? You know, play is, yeah, Pixar for sure. And some of these companies that are non-hierarchical are much better at bringing humor into the workplace, I think. But yet, if you look at, again, if you look at the research, people are much more likely to come up with innovative, creative ideas when they're relaxed. And when they're, you know, in an environment that's encouraging humor and some play, it tends to make a big difference.

The book is Little Bets, How Breakthrough Ideas Emerge from Small Discoveries. Peter Sims, thanks for being here. Great to be here, Chris. Thanks so much. Coming up, we'll talk invisible gorillas, intuition, and investing. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. So what do smart chess players and stupid criminals have in common? Should you be more like a weather forecaster or a hedge fund manager?

Is it always better for investors to have more information? Chris Chabris is a professor of psychology and neurology. He's a chess master, and he's the author of the just-released book, The Invisible Gorilla, and Other Ways Our Intuitions Deceive Us. Chris, welcome to Motley Fool Money. Thanks for having me. Let's start by talking about invisible gorillas. For those who aren't familiar with the famed experiment, can you give us a quick overview

and what is the main takeaway? Sure. The title of our book refers to an experiment that Dan Simons and I did at Harvard University about 12 years ago. It was a very simple experiment. We created a video which showed two groups of three people passing basketballs back and forth.

One of the groups was wearing white shirts and the other was wearing black shirts. And the white-shirted people passed the ball among themselves and the black-shirted people passed the ball among themselves. About halfway through this 60-second-long video, a person in a gorilla suit saunters into the game, turns to face the camera, thumps its chest, and walks off at a leisurely pace, remaining on the screen for about nine seconds.

We showed this videotape to people, and we asked them to count the number of passes that the white players were making. And then at the end, we asked them how many passes they had counted, and we said, did you see the gorilla? And the surprising result was that about half the people who saw this video did not see the gorilla at all. And they accused us of switching the tape and of making it up and all kinds of things. But in reality, there was a gorilla there, and about half the people didn't notice the gorilla.

So it shows really two things. One, we're missing a lot of stuff in our world around us. If we can be missing a gorilla walking through a basketball game, what else are we missing? But two, we're not really aware of how much we're missing. We're surprised to find out that we don't pay attention to as much as we think we do, and we don't notice as much as we think we do. And it seems that we have a lot of other ideas about how our own minds work, which are similar to this one, they're sort of predictably wrong in surprising ways.

Now, I want to dig into some of the questions you get at in the book. But first, I've got to ask, how do you even come up with an experiment like that? Who was the one who said, oh, I know, we'll have people passing basketballs and we'll get a gorilla? Like, how do you even come up with something like that? Well, in this case, we were inspired by a fairly similar experiment that had been done about 20 years earlier in the 1970s by a dick nicer who's a famous cognitive psychologist really one of the pioneers of the field of cognitive psychology i don't know how he got the idea but he didn't have a gorilla in his video he had a woman carrying an umbrella who walked through the game and we were doing a

class project at harvard actually we wanted to recreate an experiment that the whole class could participate in and it was dan simon's idea to do this one because he knew uh dick nicer and uh one other professor in the department happened to have a gorilla suit lying around in his lab that's a whole other story why people are keeping gorilla suits lying around in their labs but somehow it popped into our heads that it would be nice to try the gorilla also and to have the gorilla just walk right through the game. And it was almost a humorous afterthought, but that turned out to be the really powerful demonstration that sort of took on a life of its own after we did that experiment and published it. You just had the gorilla suit lying around, and people wonder why

Harvard has the reputation that it does. All right, let's get into some of the questions in the book. Should you be more like a weather forecaster or a hedge fund manager? Which is it? Well, it really depends, of course. If you're trying to forecast the weather, you probably want to be more like a weather forecaster. The question is really meant to get at the idea that there are some areas of knowledge where it is really possible to know how much you know and how much you don't know. People complain about weather forecasters all the time because sometimes they get it wrong. But when you actually look at their track record, when they say there's a 75% chance of rain,

if you look at all those days when they said 75% chance of rain, it actually rains 75% of those days. So they're not perfect. They don't say 100% all the time and 0% all the time, but they're actually very well aware of how much they know. And if they say 75%, that's pretty much correct. On the other hand, there are many famous cases of hedge fund managers who made tremendously large bets on particular ideas about the direction of markets. We tell the story in the book of Brian Hunter, who was a trader in energy futures, and he bet billions of dollars on directional movements in natural gas prices, did well for quite a while, and then blew up his fund completely. And that's the kind of thing that someone with an awareness

of how little they really know about the system they're trying to model would probably not do. You're listening to Motley Fool Money. We're talking with Chris Sherbree. He's the author of The Invisible Gorilla. One of the other questions in the book that you got at that mentioned right at the top, what do smart chess players and stupid criminals have in common? Well, that's another funny one, I think. Chess players and criminals usually don't seem that much alike, but there's one way in which they're quite alike and in which they're, in fact, like all of us. They are overconfident in their own abilities.

So let's take the criminals first because they're a bit funnier. There are many examples of stupid crimes. For example, a guy named MacArthur Wheeler tried to rob some banks in Pittsburgh without a disguise in broad daylight. And the reason why he thought he could get away with this was that he rubbed lemon juice on his face, thinking that that would render him invisible to security cameras, much like, I guess, children writing in lemon juice think they're writing in invisible ink and invisible messages and so on. Of course, they broadcast the security footage of him, and he was caught an hour later. and he seemed incredulous when he told the police that his method didn't work.

He was very incompetent as a bank robber, but at the same time woefully overconfident of his abilities as a bank robber. And what research has actually showed with cleverly designed experiments is that the people who are the least able at something are often the most overconfident or the most confident in their abilities. Chess players have a rating system that tells them exactly how good they are. You know, if you're a bank robber, you don't really have, like, a numerical rating system that tells you how good a bank robber you are. Right. I think Morningstar is working on something like that, like a five-star rating for bank robbers.

Right. Well, if they could get it right for mutual funds, that would be a start. The fact is that in almost all fields, we don't have perfect feedback about how good we are. In chess, we do. There is a rating system in chess which is very well calibrated, and it tells you exactly how likely you are to beat somebody else based on your two ratings. We surveyed chess players at large chess tournaments and found out that despite having this really high-quality information available to them, and they all know it, they still thought they were much better than they actually were. So there's this sort of innate tendency to think that our skills, our knowledge, our abilities are better than they actually are, and that can obviously get us into trouble when we're making investing decisions or managing other people's money. One of the things you write about is an experiment involving two mutual funds, and the subject has a choice. They can receive feedback and be able to change their allocation every month, every year, or every five years.

As investors, how often should we want that information? Well, we posed this sort of as a thought experiment. If you were an investor, how often would you want to get the information about how your funds were performing and the chance to change the allocation? And I think the answer that most people would give is as often as possible. And, in fact, we can do that every day. Right now is generally the way things are set up. But in this experiment, which was done by behavioral economist Richard Thaler and some of his colleagues, it turned out that subjects who are randomly assigned to get feedback only once every five years

had the best track record over about a 30-year period of performance than people who got feedback every month. Of course, this was not a 30-year-long experiment. This was simulated time and simulated time periods. But the result was the same, actually having less information about your performance and about how the market was doing resulted in better performance. The reason for that is that the two mutual funds in this experiment, simulated mutual funds, one was a bond fund. So it had a very low return, but also very low volatility. And one was meant to be like a stock fund. So it had high return, but also high volatility.

So people who allocated money to the stock fund found that sometimes they suffered large losses month to month, as the stock market is wont to do. and that made them move out of the stock fund into the bond fund. But over the 30-year period, it was a bad idea to have all your money in bonds, so those people didn't wind up making that much money. They got a lot of sort of short-term information about volatility, and that obscured them from understanding the long-running trend in the market. You're listening to Motley Fool Money. We're talking with Chris Chabris about his new book,

The Invisible Gorilla and Other Ways Our Intuitions Deceive Us. Now, in addition to writing the book and all of your work, You're also a chess master. What game do you think investing most approximates? Well, the obvious answer is something that has a little bit more gambling in it. If I had to choose, though, I think the right game I would pick is something more like poker. And a lot of people sort of analogize investing to a casino and so on. And to the extent that it has those characteristics, that's probably bad.

But a game like poker involves both skill and chance. You know, you can have the edge. if you study, and if you practice, and especially if you know yourself. And one of the big ways to have an edge in poker is to get control over your own emotions and to understand when you're acting impulsively and when you're not thinking things through and you're not thinking long-term. And, of course, those are the same characteristics that I would think investors would want to have also. You don't want to be making decisions based on intuition, gut instinct, and so on.

You want to be making them on a long-term plan that you can stick with and sort of use to ride out emotional swings. The book is The Invisible Gorilla and Other Ways Our Intuitions Deceive Us. It is available everywhere. Chris Chabris, thanks so much for being here on Motley Fool Money. Thank you. Coming up, a look at irrationality and investing with bestselling author Dan Ariely. This is Motley Fool Money.

Welcome back to Motley Fool Money. I'm Chris Hill. Joining me on the line now is Dan Ariely. He's a professor of psychology and behavioral economics at Duke University and the author of the bestseller, Predictably Irrational. His new book is The Upside of Irrationality, The Unexpected Benefits of Defying Logic at Work and at Home. Dan, welcome to Motley Fool Money. Hey, nice to be back. Dan, the market is up from its lows in 2009.

A lot of investors have seen their stocks regain some of that lost ground. How do you invest your own money, and how do you find yourself reacting when your investments go up? Yeah, so I try not to react. And I mean it seriously. So people do lots of mistakes when they invest. And one of the mistakes, of course, is to let emotion rule us. So here's kind of a way to invest badly. You start in the morning, and you get to the office, and you open your portfolio.

and if you're up, you're a little happy and if you're down, you're really miserable and now you make your decision based on this particular emotion that was evoked by the randomness of the stock market and I try to think about this strategy without looking at my portfolio.

So I don't look at specific things that I gained or lost because that's kind of water under the bridge. It's not very helpful and I don't want to be emotional but I can look at it and say what do I think about the future? Where do I think things are going up?

Where do I think things are going down? And let me take an action of those, independent of how much money I've lost in the past. It's kind of irrelevant. That's the first thing. And the second thing is that I try to avoid the status quo bias. So what happens is that you create a portfolio and you open it, and now the question is, what do you change?

Like, what do you sell? What do you buy? How do you change your portfolio to a slightly different portfolio? And that means that whatever decisions you made in the past, rational, irrational, thoughtful, not so thoughtful, is going to keep on escorting you through life. And what I try to do is try to imagine once in a while that somebody went at night and somehow sold everything I have. So I'm at just cash. And now I sit and I say, okay, assuming I just have cash, what would I get now? And that basically helps you alleviate some of the problems.

Imagine you bought a stock for $100 and it's now $80. It's very painful to sell it, even if you think it's going to go down, right? So people often hold on to losing stock for too long. So from time to time, it's good kind of to start from scratch and imagine you just have cash, say, what would you do now, and then move on on this strategy. The subtitle of your book is The Unexpected Benefits of Defying Logic at Work and at Home. I want to ask you, in general, how do we act irrationally at work? So big bonuses is one example where we pay people tremendous bonuses. We think they will work better.

And, in fact, big bonuses really work very well for physical tasks. So if I wanted to jump many times, you will jump more if I gave you high bonuses. But they backfire for cognitive tasks. Other ways in which these things work is that people fall in love with their own ideas. They fall in love with the things that they make. They don't see the downside of anything that is connected to us. You know, we are wonderful people. We're exceptional, and therefore everything we touch, all the ideas we come up with are exceptional as well.

And I talk a little bit about revenge as well. And there's actually one chapter that I think is particularly interesting and kind of starts, I start in the book from a story about the financial industry, which is a chapter about the meaning of work. And the story is that one of my students, ex-students, came back to visit me, and he told me that he worked for three weeks on a PowerPoint presentation for some big merger. And he sent it to a boss the day before the merger, and the boss said, nice work, but the merger is canceled. And that guy was completely devastated.

He was completely unmotivated in the next task he was going to do. And he said everything functioned just perfectly fine. Everything functioned. His boss appreciated it. He worked hard on it. He enjoyed it while he was doing it. He was sure he would get the raise. Everything seems perfectly functional.

But at the same time, he was completely demotivated. So we created the following experiment to kind of capture this. In one condition, you build robots from Lego. And you get paid for them less and less and less the more you build. So you get $3 for the first one. And when you finish, I say, Chris, do you want to build another one? You'll get $270 for that one. You say, yes, I'll give you the next one.

I say, hey, do you want another one? You'll get $240 for the next one and so on until you decide, at this price, I don't want to build them. This is one condition. And I tell you that when you finish building all of them, when you finish the experiment, I'll unassemble them, put them back in the boxes for the next participant. For the second group of participants, you build the first one. I said you want the second one. As you build the second one, I already take the first one to pieces. I break it up to pieces already and put the pieces back in the box.

And if you want to build a third one, I give you the first one back, the one that you built and I unassembled and you can assemble it again. So what happened? Two things happened. The first thing is that in this condition, which we call the specific condition, people stopped working much, much faster. And the second thing is for everybody, we measured how much they liked Legos and how long they persisted in the task. And what we found was in the first condition,

when we didn't kind of crush the meaning of labor, there was a high correlation between how long people persisted in a task and how much in general they liked Legos. But in the specific task, the correlation was basically zero, which tells me that we were able, with this very simple manipulation, to squish the joy that people were having from this task. And I think the challenge for the workplace is to say, how do we, one, help people get more value out of their work?

How do we explain to them the value of what they're doing, the connection to other things, the meaning in their work? And, of course, how do we not make it worse? How do we not kind of crush the feeling of meaning that people can naturally create in their labor? You're listening to Motley Fool Money. We're talking with Dan Ariely, author of the new book, The Upside of Irrationality. Dan, time to close things out with a round of buy, sell, or hold. Let's start with something that a lot of businesses use, buy, sell, or hold focus groups. Sell, sell, sell.

Why? Because it turns out that focus groups give people lots of confidence that they'll learn something and they know what they're doing. But the actual value in terms of information is really, really low. You're right about the biological imperative for variety. So buy, sell, or hold monogamy. are you trying to put me into a tough spot here if I had to bet I would sell

tell me why so monogamy is an incredibly hard thing to maintain and it turns out that one of the interesting things that controls monogamy is a drug called oxytocin so if you give people oxytocin and they become more trusting and more monogamous. But we don't have that much oxytocin.

Some animals have more, some animals have less. We are not, we don't have a lot of it. And, you know, I think that despite the fact that we get upset with Tiger Woods and, you know, other politicians when we discover that they've not been monogamous, the reality is that most people are not. So we have kind of this double standard. When this thing happens in society all the time, We just don't seem to admit it to ourselves that this is incredibly much more common than it is.

And, you know, the reality is that, you know, people do other things from time to time. That's just how things are. And finally, you're a married man. I'm a married man. Buy, sell, or hold telling your spouse they're not being rational. Oh, that's definitely, you never, never, never want to do that. Never, never, never. So you've never gone there with your lovely bride, Sumi?

With my lovely wife, let me say it again, my lovely, lovely wife, who's incredibly generous and forgiving on a daily basis, no. Telling her it's irrational is not the right thing. First of all, she's always rational, always makes the right decision, but no. This is not the right standard to have a discussion with your significant other. The book is The Upside of Irrationality, The Unexpected Benefits of Defying Logic at Work and at Home. It's available everywhere.

It is a fascinating read, so pick it up. Dan Ariely, thanks so much for being here. My pleasure, as always. As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. If you haven't already, check out MarketFoolery, our new daily podcast, every Monday through Thursday on iTunes and on MarketFoolery.com. That's it for this edition of Motley Fool Money.

our engineer is Steve Broido, our producer is Mac Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.