We Study Billionaires - The Investor’s Podcast Network - TIP 022 : Influence - The Psychology of Persuasion - Robert Cialdini's Book (Investing Podcast)

Starting point is 00:00:00 This is episode 22 of The Investors Podcast. Broadcasting from Bel Air Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish and Sting Broderson. All right, guys, you ready to do this?

Starting point is 00:00:30 So today's episode is going to be pretty exciting. I'm your host, Preston Pish, for the Investors Podcast. And as always, I am accompanied by my co-host, Stig Broderson, out in Denmark. Today we brought Colin Yablonski back on the show today. He was with us last week with the real estate episode. And today we brought him back because Colin sent me a very special Christmas gift this year. It was probably, did you get it to me before Christmas or did it come as a late Christmas gift? I can't remember, Colin.

Starting point is 00:00:59 Yeah, I think it came probably early January, something like that. Geez. I know, not a very, you know, accurate Santa Claus present. It was wrapped, though, I have to admit. So this is crazy. So I get these cues throughout my life. I don't know if you guys have similar events, but I get these cues where things keep reappearing and they keep popping up. And after I see this happen like three times, I take the obvious hint that somebody's trying to tell me something. And this book happened to be one of those cues where we had the interview with Guy Spear and he kept mentioning this gentleman, Robert Cheney. Chaldini. He kept saying Chaldini. And so I was like, I got to figure that gentleman out and research that more. So then Stig and I were building this list of all these different billionaires and

Starting point is 00:01:43 what their favorite books were. And by the way, that list is up on the top level page of the Investors podcast. If you guys want to see that list, we got like, I don't know, 10, 15 billionaires Stig. I don't remember how many. Yeah, that seems right. There's about 10 to 15 billionaires. And then we found all their favorite books and then we found quotes on why they like those particular books and we built this list. And one of the books on there was Charlie Munger. One of his favorite books was influence. In fact, I think influence is his favorite book. And Charlie Munger, just so you know, is the vice chairman of Berkshire Hathaway. And so he's a billionaire. And his favorite book was this book, influenced the psychology of persuasion by Robert Chaldeen. And so that was the second

Starting point is 00:02:26 clue. And so then I walked down to my mailbox here at the end of January thinking that all my Christmas gifts have been opened. And then Colin Yablonski sends me a book in the mail, which really excited me that I knew was a book. And then it was in wrapping paper and I open it up. And it's influenced by Robert Chaldingy. So I took the obvious hint. It was practically smacking me in the head this time to read this book. And to be quite honest with you, after reading it, I'm a little embarrassed that I hadn't read it before because this is a powerful book. if you have not read this, you are doing yourself at this service. This was a profound read.

Starting point is 00:03:04 So just to give you guys, I mean, the title really says it all. Influence the psychology of persuasion. And if you're a marketing person, this book is definitely going to be one of the staples for your industry. But for anyone who's not in marketing, and you're just trying to understand how maybe you can be a little bit more effective at work or whatever it is that you're trying to accomplish, I would strongly encourage. I would strongly encourage you that this book is the one that's going to probably give you some of the most information on how to do that. So anyway, the book starts off, and I'm just going to start off with how the book begins. And then what we're going to do is we're going to do around Rob and where Colin's going to talk about the next chapter. Then Stig will talk about the next one.

Starting point is 00:03:42 And there's only a few key points in this book. And we'll cover each one of those key points. So the book starts off with this story about a lady who's selling jewelry. and she lives in like a vacation resort type area where her store's at. And she's trying to sell blue topaz, I think, is what it was. So what she's trying to do is she's trying to sell these blue topes stones that she has in her jewelry store. And she's having difficulty doing that. And she leaves this note for one of her workers that are going to be opening up the store the following day.

Starting point is 00:04:14 And she says, you know, mark these blue topes half off. And she writes the one slash two in a certain manner that would have. it was a little bit difficult to understand. So the lady, the store owner, comes back the next day. And to her surprise, every single one of her blue topazes were sold. And this is where it got really interesting. Because the lady says, you know, so I went to see what my revenues were from selling the blue topazes. And whenever I looked at the revenue that was generated, I was shocked and I was floored.

Starting point is 00:04:48 And she was floored because she had actually made double what the price. was where she couldn't sell, the price point that she couldn't sell it at, the employee had actually doubled the price of the stones and the employee sold out of all the stones because they were twice as expensive. And so the story, the book starts off with that story, which I thought was a really, you know, attention grabber. And so the lady contacts Robert Chaldeen who she knew evidently from some way or the other. And she said, you know, I need to understand. why this happened. What in the world happened psychologically that made this occur? And Chaldini says, well, before I answer that question, I first got to explain something that's a little bit more

Starting point is 00:05:33 profound and how psychology works. And he starts off with this story about turkeys and how mother turkeys take care of their young whenever they're born. And he said, a mother turkey will only take care of their babies if the babies are making a cheap sheep sound. If the baby isn't making that sound, then the mother doesn't come over and care for it. And, And so what psychologists had done is they run this test where they took that idea to the next level where the turkey has a predator. And I can't remember. Do you guys remember what the predator was? I don't know if it necessarily says what the type of bird is. Yeah, we don't know.

Starting point is 00:06:08 But there's some type of predator. Stig's looking it up in the book right now. So the mother has this predator. And whenever that predator comes around, the mother vehemently attacks this predator. And so what the psychologist did, they came up with this idea. Well, let's see if we can actually get the mother to take care of and to influence the mother to the point where she'd actually take care of the predator. And so what the psychologist did is they replaced, they took basically like a fake mock up of this predator bird. And they put the cheap, cheap sound inside of the fake bird. And then they put that bird in front of one of these mother turkeys to see what would happen.

Starting point is 00:06:48 And sure enough, whenever they did that, the mother turkey came over to this predator and basically started coddling the predator as if it was one of her young or one of her babies. And so Chaldini starts off the book with this example because he says that animals, whenever there's a certain type of reaction, that whenever there's this A quality of this A variable, there's an immediate and not even thinking reaction. with B. And so for like this example, the A variable is the cheap cheap. The reaction, which is the B, is the fact that the mother goes over and cares for them whenever they hear the cheap cheap, regardless of all the other variables. And so Chaldini says that although this happens in the animal kingdom, he says it actually happens in the human domain as well.

Starting point is 00:07:40 And so that's how he starts the book. And for me, whenever I was reading this, I was just like, oh, that is really cool. So I'm very excited to know what in the world. He's going to say that humans react and how we have this A to B reaction. And what are they? You know, I really wanted to figure out what they were. So in real general terms, and I want to put this out there because if I don't say it now, I'm going to forget, in real general terms, and this is an overview for the whole book, Chaldeini makes the argument that

Starting point is 00:08:08 because there's so many variables that we are experiencing as humans, we can't, our minds can't possibly account and understand all the variables all at once. And what he says is what happens over time is that we create shortcuts. And we create these ways to compensate and to live in this world with all these different variables so that we can do things more efficiently. And because we create these shortcuts, that is the reason that this A to B exists. Okay. And so for the opening scenario of the book where he is talking about this woman trying to sell her blue topes, he says that the reason that this woman was able to sell them at twice the price is because you had a couple different variables.

Starting point is 00:08:55 You had people on vacation willing to spend a lot of money. You had people on vacation who didn't want to spend the whole day in the jewelry store looking for jewelry. And so what happens is there was this A to B reaction that whenever people see A, the higher price, their reaction was B, that's a higher quality. and a better stone than anyone else. And they made that reaction and they made that full circle as to there is higher quality, a better product because it's a higher price. And therefore they purchased it and they went on their way. And that shortcut is what really caused that to occur.

Starting point is 00:09:30 So that's an opening for the book. Okay. So let's just jump into it here. And what I just described was really the first chapter. So now what we're going to do is we're going to talk about the second chapter, which is reciprocation. So Stig, go ahead and fire away what you learned about reciprocation in the second chapter. I think I learned a lot and I learned a lot about Colin, to be honest, because after I got this book, I think we invited him like two or three times, Preston.

Starting point is 00:09:56 Seriously, this stuff works. And Colin's a perfect example. He's really blushing right now. Yeah, no, it was great. And I have to say, I think after I sent one book to Stig, he actually sent me two books back in the mail. Oh, geez. Yeah, I actually did that. And I didn't think of it. But yeah. Yeah, sure he didn't. Wow, that's scary. Sure he didn't. All right. Keep going. We're ridiculous. Yeah, I had stick. Okay. No, well, I think that the principle of reciprocity, I think that was probably the most valuable chapter, at least for me. And, you know, we probably all know this situation. So if we had, like, service from a waitress that is really, have shown a good service, you know, then we are probably inclined to tip her more.

Starting point is 00:10:44 If we get free samples for a product, we're probably inclined to buy products for that company. So, you know, this happens all the time for all of us. And it's really a strong rule that I think that everybody subscribe to, probably no matter what they're saying. And what I found was really, really surprising to me is that you might be thinking that if you like a person, you are more inclined to reciprocate to that person if he does something to you.

Starting point is 00:11:13 For instance, I like Colin. So apparently when he sends me a book, I will send him two books and invite him on my podcast. But this chapter actually shows, and there's a lot of research about this, is that, even though that you don't like the person, you actually feel at least as much obligated to repay that debt, probably because you don't want to feel like you owe that person anything. So, Preston, I see you have something there. I really like the example Chaldini used in the book for this one. And he talks about this gentleman and this lady.

Starting point is 00:11:45 The lady's car broke down and this gentleman came over and really helped her at the end of the workday. It was dark out. And he came over and helped her get her car started and saw her on her way. And so Chaldini said that I guess this gentleman had some issues in the human resources department where I guess some of the executives were trying to get rid of him. And the lady who he was helping actually worked in the human resources department. Because this event had occurred where this gentleman helped this lady out, this lady talks about her experience in how she was trying to prevent this gentleman from getting fired, even though she had no idea why they were trying to get rid of him or whatever event had led to maybe his demise in the company. She found herself fighting for this gentleman to stay there because she had this pool or this obligation to repay the service that he had rendered to her. And so I really found that example profound because it talks about a gentleman who maybe was in trouble for a reason that he definitely needs to be removed from the company.

Starting point is 00:12:48 But yet the law of reciprocity was so strong that it kept her interest in keeping him in the company there regardless of whatever those circumstances were. So I really thought that that was a great example. On a personal note, I just want to highlight that I think that I see the world in a very strange way. and I think a lot of people point that out to me from time to time. But I see the world that whenever you do an act and you give, okay, I feel like there is some type of intangible nature that is inherent to the way the world works, that the balance of that action needs to be repaid or it needs to come full circle so that it's balanced. It's almost like you as an individual person has a balance sheet. You know, and I know we're hardcore accounting people, but stay with me just for a second. So imagine that you do an act and it doesn't have to be a monetary act.

Starting point is 00:13:41 It could be any type of act. And whenever you give and you do something in somebody else's interest, I feel like that is some type of asset that's added on to maybe like your personal balance sheet that then has to be balanced somehow. And I think that the hard part for people to understand and maybe to buy into that is because they think that the balance needs to be conduct. immediately. And I'm here to argue that the time element in this balancing of your life is something that is not bound by time. If you do an act, you might not actually see the balance of that for maybe 10 years, or you might not see the balance of that for five years, or you might see the balance of it in five minutes from now. And I know personally, whenever I've given to a charity or just to another person with my time, it's amazing because sometimes I see it

Starting point is 00:14:31 immediately it comes straight back. And then other times I'll just have these random events that happened like years later. And I'm just like, you know, I think that that was a balancing of something that I did a long time ago. Those are my personal opinion. Some people might think that that stuff's crazy. But I think that I just wanted to throw that into this section because Chaldean is talking about how reciprocation occurs. And I think a lot of people immediately think that it has to happen right now or it has to be monetary. And it is not.

Starting point is 00:14:59 Just something I wanted to highlight and just throw out. there of Preston Pish's, some of Presson Pish's crazy thoughts, but I see Colin, you have something you wanted to add. Go ahead. You know, and it's funny that you bring that up, Preston, because I used to think the same way about things like karma. It seemed kind of, you know, intangible, but really that's what he's talking about. It is karma, but it's based on science, which I found really interesting, because if you reciprocate to somebody or if you do something really nice to somebody, and then they reciprocate, that's basically just fulfilling that. that karmic, you know, cycle.

Starting point is 00:15:34 Now, another thing that I wanted to talk about was how reciprocation can be used by what Chaldeenie calls compliance practitioners. And that's that reciprocation typically isn't a one-to-one relationship, that it actually creates a feeling of indebtedness in some cases to the person. So the example that they use in the book is talking about the Har Krishna. I think I'm pronouncing that correctly. The Har Krishna sect. And they were a sect that had attempted to collect donations.

Starting point is 00:16:07 And so they would have these really large, extravagant showings at airports and things like that. But it wasn't effective in them actually receiving any type of monetary return. So they made this shift towards giving somebody a passerby, a random person in the airport, a flower. And so they would give this person, this little fake flower. they'd stick it in their hand or they'd button it to their lapel and the person not really knowing what was even happening would receive this flower. And what was interesting is that just the fact that they were now receiving that flower, they felt obligated and indebted to reciprocate in some way, shape, or form. And they typically would then give them a dollar or two dollars or something like that. And it dramatically increased the amount of money that this organization was generating.

Starting point is 00:16:59 So the one thing that I can say, Colin and Stig, that I really liked about the book was the fact that Chaldini backs up every one of his claims with just a ton of scientific proof. And you briefly mentioned that, Colin. He will provide example after example of, hey, we ran this study on 100 people and then this is what happened. And then he provides examples like, you know, the one that I described, the one that Colin described. and he really backs up all of his claims with proof, like hard quantifiable proof. And that's one of the reasons I think that I enjoyed the book so much. And I can understand why Charlie Munger, you know, rates it as his number one book.

Starting point is 00:17:39 Go ahead, Stig. I saw you hit something else. Yeah, because, you know, this is really just something to listen out there because I think a lot of people, you know, listen to us and, you know, feel what a lot of great anecdotes. Like, and they might not be thinking, well, is that really how it works? in real life and really is. I mean, Chaldeen, he's really a smart guy, he's a PhD and a professor. I mean, he really knows what he's talking about.

Starting point is 00:18:03 I think that the difference probably is that he's also a good storyteller. So every time that he found like a good relation of if this happens, it's because of this, he can always bag it up with an enjoyable story that we can all enjoy. And for that question, for that story about Harder Krishna, Colin,

Starting point is 00:18:22 Do you remember how the Harat Krishna got more flowers to do the same trick over and over again? Yeah, it was really interesting. The people who had accepted the flower were basically dropping them in the trash can as soon as they had walked away and made their donation. And the sect would actually follow up, go to the trash can, pull out the flowers, and then they would cycle through again. Yeah, and that just really shows that the flower had no value whatsoever. It was the whole process of handing into another process.

Starting point is 00:18:52 person and feel like that that was really doing the difference here. Okay. So the next thing that Chaldini talks about, and this is in his third chapter, he talks about commitment and consistency. So I really like this chapter, and I have a story literally from yesterday that I'm going to bring up to talk about to demonstrate this principle that he has. And so he says that people want to be known as being consistent and committed to what they say. So I'm going on travel this week and I'm going to be flying way down to Arizona and I'm

Starting point is 00:19:26 going to be out of the house and my wife needs help with getting the oil changed in the car. Well, this company that we bought our car from, they give you free oil changes. So I'm not going to go, you know, pay for it somewhere else. And I kind of found out about this because I actually came back from another trip that I was on this week and I just came home and I saw that the oil needed changed. And so I called up the car company and I tried to have them get me in at the last minute. And so I called up this lady and she says, well, you have to get a manager to do a last minute oil change. I understand you're going on travel. And so I said, oh, yeah, no problem. So she put the manager on and I talked to the manager. I said, I really need some help. You know,

Starting point is 00:20:04 I'd really appreciate anything you can do. It's, you know, it's my fault that I'm asking at the last minute, but any exception to the policy that you can make, I'd be just very appreciative. And so this manager said, yeah, no problem. Bring it in tomorrow and we'll take care of it. So, you know, I brought the car in the next day. I got in there. The girl checked the car in to do the oil change. And my wife and I left because they had to keep the car for a little bit. And so my wife and I left on another vehicle.

Starting point is 00:20:31 And as soon as we're driving away, I get this call back from the lady. And she says, you know, we can't take the car today. I'm really sorry, but we're just totally booked and we can't do it. Your name wasn't on any of the rosters or whatever. And so I said to the lady, I said, I really need some help. and I described what my problem was and she wasn't budging. And then I said the magic word. I said, well, you know, I called yesterday and I talked with one of the managers and the manager had committed to the fact that I could bring it in today, even though you guys were booked and that you guys would do it.

Starting point is 00:21:03 And as soon as I said that, she says, well, we'll figure it out. I don't know how we'll do it, but we'll figure out a way to get it done. And that was it. Like, that was all it was. and it goes straight to the heart of this principle of commitment and consistency. So the company, the person, it wasn't even her commitment. It was another person's commitment. But because a commitment was made, they stuck to it.

Starting point is 00:21:28 They didn't want to go back on a commitment that they had made. And so in Chaldini's book, he talks about telemarketers calling your house. And he says, one of the first things that a telemarketer will say to you is, hey, how are you doing today? And what the telemarketers doing is they're trying to slowly progressively ramp you up into a position where you're making more and more commitments. So if you say, are you doing good today? They ask you that question and you say, yeah, I'm doing pretty good. So that's the first level of commitment. You had consistency, you had commitment.

Starting point is 00:22:01 And then they ask you the next question. And they slowly work you into a position where the next thing you know, you're buying, you know, life insurance that you didn't even need because you already have it or something like that. And so that's really the principle that he's talking about here. And so Stig, did you have any points that you wanted to add on this one? Okay, so this is another great example from the book. And I think this is an example that a lot of parents can recognize. So what is happening is that we buy more toys around Christmas. So that probably comes at no surprise.

Starting point is 00:22:30 We buy a lot of toys. And what the time factors, that problem is that we stop buying toys after Christmas. Yes, that makes a lot of sense. but they actually found a way to work around that problem. And what they're actually doing, and this is really incredible, what they're doing is that they're marketing specific toys before Christmas, and then they're under supplying that toy. Now, you might be thinking, why would the undersupply,

Starting point is 00:22:55 why would the advertise for a product, and then, you know, not supplied to the market? But the thing is that all the parents run out to the toy stores and, you know, looking for this toy. They can't find it, so they'll buy another piece of toy for their son or the daughter just before Christmas. But since they have promised the kids their specific toys before Christmas, they have to go back into the store

Starting point is 00:23:17 like one month later and pick up the toy again. So with this very, very neat little trick, they actually doubled the sales of toys just because the parents have committed to something and they want to be consistent. Colin, I see you have something there. Yeah, and the other component of this

Starting point is 00:23:33 that I found really interesting is how it talked about building on small commitments and then building them up to larger ones. And my favorite example of this is people, typically politicians or things like that that will first come to you and say, hey, you know, do you support XYZ cause? And it could be, you know, slowing down traffic in your neighborhood or something like that. And you just being a good person say, yeah, you know, I want to keep kids safe. I don't want people speeding in my neighborhood. And so you've made that commitment. Their next question to you, though, is typically, well, will you put some type of small sign?

Starting point is 00:24:08 in your front yard, because you've made that first small commitment, the likelihood that you will now put that sign in your yard goes up exponentially. And so it's such an interesting process because the other component of it is that the more public, the stem that you take, the more reluctant you are to actually change it. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:28:33 slash WSB. All right. Back to the show. Yeah, so I love this part of the book. So I'm probably going to mess it up a little bit. So for people that are reading it, from what I say to what you read, it's probably going to be a little bit different. But it went something like this,

Starting point is 00:28:49 and it hits on the point that Colin brought up. Chaldini talks about this study where they had people that put like a small sign that people had to say, go slow in the neighborhood. And so they got a large, number of people to commit to putting this small sign up. But then they came back and they asked the people to put up like this monstrous sign, like one that was just awkward and something you would never put up in your yard. And because people had made the smaller level of commitment to the

Starting point is 00:29:18 smaller sign, they felt like they were part of this movement and they had made this prior commitment and that they were trying to remain consistent with that commitment that they put up this big honkin sign in their yard. And it was probably the most embarrassing thing ever. But in order to to protect their consistency, they put the sign up anyway. And it was a very high percent, like a percent that was like kind of mind blowing. And he had this in a study. So what I found really interesting about that is that it is so closely connected to our perceptions of ourselves. So when we make a small commitment to say, hey, I actually support people slowing down in my

Starting point is 00:29:54 neighborhood and I don't want drivers to speed through our neighborhood. And I'm going to take a stand on that. It actually changes our self image and our identity at a certain. level. And that's why we feel so compelled to stay consistent with our initial commitments. So this is where I really found this whole point really profound is Chaldini then makes the reference of, so whenever you're even making the smallest level of commitment, you have to really think hard about that because you don't know how that's going to influence you later on with maybe a larger level of commitment. Because next thing you know, you might be,

Starting point is 00:30:33 fully committed to some type of organization or some type of event that maybe you never even had a real interest in from the beginning, but because the level of commitment was so small, you just found yourself going down this path and you found yourself in a rut, just continuing to commit to whatever it is. So I guess the point is this, be very conscious of even the smallest level of commitments that you make because it might have a profound impact on the direction of your life. And Stig, go ahead. I saw you at a point.

Starting point is 00:31:01 Yeah, I'm really sorry, guys. I always find a way to relate this to stock investing. And I got this, I thought, the minute I read this, and I think it was Moni's Pop-Rai who said, and if it wasn't, I'm really sorry, Poverai, but I think it was Mons Pobrii who said that he will never, you know, tell to the problem when he bought a new stock unless he really had to, and, you know,

Starting point is 00:31:24 people acquired to disclose that. They have their own company and their public and everything. But he would not say that because he felt more, obligated to keep investing in that company, or even though if he was wrong, he would not sell that stock because since he was now in public, he would seem inconsistent. And so he was really, you know, shy about it because he knew that he could not act rationally if he was, you know, telling everybody what he was doing. So that was just like, I think that we can probably all relate to that one way or the other.

Starting point is 00:31:53 Like if you said something out loud, if you said it to a lot of people, it's really hard to deviate and admit if we made a mistake afterwards. Totally agree. And you know what? It kind of plays into the next chapter. So the next chapter is called social proof. And so I really like the example that he had for this one. And we were actually briefly talking about this before we actually started recording. And so the way that he starts off this one is he talks about a study that they did where a gentleman was on the busy streets. I don't know if it was New York City, but it was a big city. And this gentleman's standing on the sidewalk and he's just looking up. He's doing nothing. more than just looking up. And what they were tracking is they were trying to figure out how many people are going to look up just because this guy over here is looking up. And you talk about a scenario that totally relates to stock investing. I mean, you can't get a better scenario than this.

Starting point is 00:32:46 So this gentleman's looking up and people are walking by and really no one is looking up because this one single solitary person is looking up. But they then change it. And they have four people looking up, all kind of in the general same area. And whenever they had four people all looking up and they weren't looking at anything, they were just looking up. Whenever they had that scenario and people were driving by in their cars and walking by on the street, every single person, the percentage was like astronomical. Every single person looked up to see what was up there. And you talk about a scenario that really relates to investing or just your everyday life.

Starting point is 00:33:26 Whenever you see a large crowd of people doing something, the immediate inclination. is I need to be doing it too. And I think it's definitely driven by just our inherent nature of survival that drives this A to B reaction. Yeah, I completely agree with your president. And I also think it relates to being uncertain and have insufficient data. You know, very, very few people, I have to say, really understands what's happening in the stock market. So if you are a small-time investor, then there's a good chance that you would talk to your neighbor and you talk to your colleagues about stock investment. So if you hear that everybody else is pouring money into the stock market, you know, you don't, you know, look at the hard data and thinking, well, should I invest? You're thinking if everyone else is doing it. And because you don't have sufficient information to make a like area informed decision, then you just tend to do the same as anybody else. And I think that's really something I can see from myself, perhaps not in stock investing. But, you know, if everyone is ordering the same thing at a restaurant where I've never been before, I might just be a pus over it. I order. I

Starting point is 00:34:31 the same thing. So I think it's a really strong thing. And Colin, I see that you have a good point. Actually, I wanted to build on one of the subsections of social proof, which Caledini calls pluralistic ignorance. And this was probably the concept that was most interesting to me, which was the failure of an entire group of bystanders to aid victims who were in need of help. And I know this takes it a little bit away from stock investing, obviously, but it was the concept that because nobody was doing anything in these situations. Everybody did nothing. And the example that he gives in the book is of a lady named,

Starting point is 00:35:11 I think her name's Kitty Genovese. And she was actually, to set up the story, she was being attacked. And it was over something like a 35 minute timeline where she was being attacked. She was being stabbed on the streets of New York City. And something like 38 bystanders were around just watching this attack take place.

Starting point is 00:35:30 And it was just, unbelievable because everybody was looking around and because nobody was doing anything again everybody was doing nothing so i thought that that section of the book was was extremely interesting so i'll take the next chapter and the next chapter is the liking principle so the principle that we prefer to say yes to people that we like as opposed to people that we don't and again a really really interesting concept one that i i don't think most people are aware of and the example that they give in the book is Tupperware parties. So the parties where you go and you sit in somebody's house, they make you hors d'oeuvres, they make you fancy drinks, and then they proceed

Starting point is 00:36:15 to sell you overpriced Tupperware containers. And so I thought that that was really interesting because the reason that most people are going to these Tupperware parties in the first place, and the reason that they're buying these products isn't because they necessarily need more Tupperware for their home, they're doing it because they like the person who is hosting the party. They're their friend. They've, you know, maybe they've done something nice for them in the past. And actually, this leads to something that's really interesting about all of these rules is that you'll see them start to compound upon one another where, you know, you have things like commitment and consistency. Well, this person has been really great to me in the past and they've done things for

Starting point is 00:36:57 me in the past. So why wouldn't I go? They're social proof because, hey, all of my my other friends are buying it, why wouldn't I buy it? There's reciprocation because, hey, they've given me food and they've given me drinks and I'm having a really fun time. Why wouldn't I reciprocate by buying? So anyway, it was a really interesting look at how liking somebody can actually have a huge impact on your psychology and your buying decisions. Well, one thing I really liked about the book, and I think that was really important that Chaldeen include that in the book, was that how do you say no? I mean, if you experience like social proof

Starting point is 00:37:34 or if you like a person, how can you say no and make a rational decision? And what he's saying is that, you know, for something, if you really like a person and perhaps that person is selling a product, do whatever you can to separate the product or service from the salesperson. And I'm not really saying that you shouldn't,

Starting point is 00:37:55 you know, go to topware parties or, you know, if it's a good friend, you know, Bauhol means buy that piece of towerware if you need it or not. But, you know, just think about this in terms of taking decision. Is it because I like the person, perhaps the sales personnel, or it's because I need the product? So if you can make that connection you had, I think that you shouldn't be too intimidated to enter a store again. I mean, guys, when I read this book, I was like, I would never go shopping again because just so many need examples of. Sophie was shopping for you anyway, Stig.

Starting point is 00:38:29 Sophie was going out and buying all your clothes anyway. You weren't shopping. It's so obvious, huh? Yeah, because her taste is so good and you dress so well. I hope you're listening, Sophie. The one thing I wanted to throw out there, what was the Joe Girard, he's known as being the number one car salesman of all time. And this liking principle, Joe Gerard, was brought up

Starting point is 00:38:55 because he would send out these postcards, the people that had purchased cars from him and he'd send him out every single month. And on the postcard, it wouldn't say anything more than I like you. And so, I mean, it really shows you like when somebody's saying those things about you and they're trying to be very friendly, it's hard to go and buy a car from somebody else. If this guy is like sending your postcards every month saying he likes you and whatever else and it just really kind of shows the impact and the power of that principle, which is the liking principle. So the next chapter is chapter six and it talks about authority. So I really, really like the example that he had in this chapter. And the example went like this.

Starting point is 00:39:36 So he had some boys and the boys were younger, I would say, under the age of 10. And they brought these boys into a room and they had three toys for the boys to play with. One toy was very desirable. It was like a robot. And then the other two toys were not very desirable. They were probably like one Lincoln log or something. something like that. And so what happened was is this gentleman would come in, this authority figure would come in, and he would look at the boys, the individual boys, and they ran this experiment a

Starting point is 00:40:05 bunch of times to collect data. And they would look at the boy, this gentleman would look at the boys, and he would say, you are not allowed to play with the robot toy. You cannot play with it. Really didn't provide any reason why. I didn't say because or anything. He just said, you are not allowed to play with this toy. And then the gentleman would leave, and then they would watched the individual boys to see what they would do. And so what they found was, and I'm going to mess up the percentages, but this is kind of a ballpark. I want to say it was like around 70% of the boys did not play with the robot after they were told by this authority figure to not play with them. So this is where the experiment got really interesting. So what they did is they went back

Starting point is 00:40:46 and they fast forward maybe like a month or two months or something like that. They set up the exact same scenario, but now the authority figure is not involved in the situation. They just bring the boys back into the room and the boys now have the decision to play with whatever toy they want. And they wanted to see the impact of how that man influenced the boys over the long term. And what they found was that like 70% of the boys went immediately to the robot after the time, after they had more time and this gentleman was not involved. Okay. So the impact the authority and the influence that this gentleman had was literally nothing over the long term. He only had short-term authority and influence.

Starting point is 00:41:29 So then what they did is they ran this whole experiment over again, but they had the authority figure act differently. This time, the gentleman came in and he basically reasoned with the children and provided them a reason why they shouldn't play with the toy. And he ultimately left the decision up to the boys to make their choice. of whatever they wanted to do. And he put it in a position that the child was actually making the decision of whether he was going to play with it, opposed to the authoritative figure making that decision for them.

Starting point is 00:42:03 And so the gentleman left in the short term whenever he initially introduced himself and put these ideas into the children's heads. He left and had a very similar, almost identical response where 70% of the kids did not play with the robot toy. But here's where it got really interesting. So fast forward again a couple months, and now the boys are presented with the same three toys again. The gentleman was not involved in the later encounter, but here's where it was different. His influence continued to progress with the time element.

Starting point is 00:42:38 And when the boys went back in there, they still did not play with the robot toy. And this was like the same number that they had on the short term. And like 70% of them still didn't play with the robot toy because the child at that point had made the decision. So this is really important. I think this is something that a lot of parents really need to listen to and think about whenever they're dealing with teenagers or children whenever they're in their teens because, and he brought up a point in the book with preachers and how preachers children actually in the short term go and do the exact opposite of what their parents had been telling them to do. And Chaldini relates us to the fact that they were being forced to not do something. thing. Like, hey, you are not allowed to drive your car. No reason, no nothing attached to it. And so because of that, the reaction and the way that they were being influenced was that actually do the exact opposite.

Starting point is 00:43:33 And Chaldeini recommends that if you want to have real influence and lasting influence for the child not to do something, the way you go about it is you have to explain it. And you have to make the child almost feel like it's their idea or their opinion that they've arrived at that decision. and then it'll be a lasting influence. So I love this chapter. I think that this chapter was really profound and it can be applied in many different manners. But it really goes to people that if you're a person who's directing a lot of requirements as a leader, and I think leadership could really play into this.

Starting point is 00:44:07 If you're trying to direct and embossing you around and telling you what to do because I'm in charge, that'll work. But it'll only work in the short term. It does not work in the long term. And if you're trying to set up a business, or you're trying to run something and you want to have a lasting impact so you don't have to say the same thing over and over again. This is an extremely profound principle that you might want to start giving a lot of thought to. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:47:51 Back to the show. So another interesting section in the authority chapter was the Melgram experiment. And this is a really famous experiment that happened in the 60s or 70s. And to set it up for you, there were three people involved in the experiment. There was an authority figure. There was a student and there was a teacher. And so the student was on one side of the glass, the teacher and the authority. figure were on the other side of the glass.

Starting point is 00:48:17 Now, the student was asked a series of questions, and just to let you know, the student was also part of the experiment. They were hired by the researcher to basically get the questions wrong and to act in a certain way. So as the person got the questions wrong, what the teacher would do is apply a certain amount of voltage or a shock to the student. And every time the student got the question wrong, they would increase the voltage. Now, what was really interesting about this experiment is that as the voltage kept getting higher

Starting point is 00:48:51 and as the student kept getting the questions wrong, he would scream out in pain, say things like, I have a heart condition, please stop this. And every single time, because the authority figure would say apply that shock, the student would continue or sorry, the teacher would continue to do that. And at the end of the chapter, they talk about what the psychologist thought would be the result of this. They thought that something like one in one thousand people might take it all the way to a voltage level that would potentially kill a person or cause some significant harm or damage to their body. And what ultimately happened is that something like 65% of people

Starting point is 00:49:33 when they were told by an authority figure to continue to apply voltage, they did so. So it was just a really powerful experiment and I see Stig, you have something there. Yeah. And, and And this relates to the next book, the person I'm reading, which is outliers by Gladwell. But in that book, he's talking about power distance or a concept he calls power distance. And I think that's something that's really interesting here because I'm sure that someone of distance might be thinking, I would never do that. I would never, you know, hurt another person because authority tells me that I have to. And I got to, you know, stress no one was harmed doing these experiments all like X or so.

Starting point is 00:50:12 But I really want to talk about is power distance. So this is really a cultural thing. So you have like some countries that have a high power distance like Guatemala and the Philippines. And in these countries, you cannot just say, you know, I ain't going to do that because you are just the way you are raised and the way that you see society, if an authority tells you to do something, then you just have to do it. Then you have countries like the U.S., which is like in the lower middle part of the the power distance index.

Starting point is 00:50:44 This experiment was conducted in the U.S. And even, you know, the power distance is not that vast in the U.S., people would still harm all the other, you know, participants in the experiment. And I think that was really, really frightening to read. Yeah, and he talks, and not to talk about our next book because we'll do that one next week, but Stig brings up a great point. And he talks about in Malcolm Gladwell's book, which totally relates to this idea, he talks about airline pilots from South Korea, how they were constantly making these mistakes.

Starting point is 00:51:16 And it had to do with the fact that the authority pilot and command of the aircraft, the second pilot who's there to assist and help, always felt like he was not in a place that he could even help and assist and bring up maybe an air because of this authority figure setting that they had. But anyway, we'll talk about that more whenever we talk about Gladwell's book. but really great point to say because it definitely it definitely hits on this point that Chaldini's talking about with authority. So the last point that we'll talk about in this book was the scarcity principle. And so Chaldeini brings up a fantastic example that really kind of made me smile. So he talks about how he lives out and Chaldini's from Arizona. That's where he teaches at the University of Arizona. And he talks about how there was a new Mormon church built.

Starting point is 00:52:07 in that local community there. I think it was in Arizona. And what they do whenever they create or they make one of these new churches is they put out an advertisement in the newspaper that people can come back and they can see the inside of the church for the only time. And it's only for a limited time. They can only see it for about a week. And it's published in the newspaper.

Starting point is 00:52:28 That's how Chaldeenie saw it. But it says this will only be a limited viewing. People from the outside can only come and see this for a limited time. time and the last day to see it forever is this date. So if you don't come by then, you'll never have an opportunity to see the inside of this church unless you're a member of the Mormon community. And so he talks about how he's not Mormon, but how drawn he was to go and see the inside of this church because he felt like he was missing out on something that was really quite special that only a unique amount of people get to go and see. And so he started. He started

Starting point is 00:53:07 studying why am I drawn to this? Why do I want to go and see this so badly? And it had to do with this idea of scarcity in that when people feel like something is only going to be available to them at a limited time and that they aren't going to be able to ever have it again, they are totally drawn to it and they're totally influenced by it and that they want to go see it. And so Chaldeini says, you know, at the end of the day, I had no desire. If this was open to me, at all times, like I could go into this church anytime I wanted to, I would probably never go and see it. But only because of the fact that there was a time restriction on it, there was a scarcity where I could only have it for a short amount of time, I wanted to go see it in the worst way. And it wasn't something I was even interested in.

Starting point is 00:53:52 So I found that to be really interesting and a great example to highlight how this chapter, this scarcity idea is impacting people in their everyday life. And just in the connection of that, and sorry guys, I had to talk about stocks again. But what Jaldini is saying is that we tend to react more to losing that the potential to benefit. And I think that something is really profound and something that you see a lot when it comes to stock investing. When it comes to stock investing, do you think a lot in terms of what can we lose? We're not that interested in what can we gain from it. And I think this example you bring up here, Preston, with the Mormon Church. I think that's a great example because you only had like one week where you could go and visit this, this temple or this church, even though that you, I mean, you probably didn't want to see it in the first place.

Starting point is 00:54:43 But just because you had the potential to lose, that was really, I suppose, doing the trick. I know I personally act different whenever I'm, whenever you come across a windfall or something that you didn't necessarily earn or try to get. Let me give me an example. So this past Christmas, my wife and I, or actually, it was our birthday gifts because our birthdays right after Christmas. My parents gave my wife and I two $50 gift cards to a restaurant called Bonefish. And so my wife and I go out, we got a babysitter to watch the kids, and we go out to the restaurant and we're sitting there. And I mean, we were just ordering stuff that we normally would not order.

Starting point is 00:55:21 We were getting like every appetizer. We were getting desserts. We were getting all this. Like, we went all out. And we normally wouldn't do that. We'd probably just kind of have a nice, meal and not spend, you know, $100 on the two of us. But we went out and did that.

Starting point is 00:55:36 And I really think that the reason that we reacted that way and in that manner totally relates to this principle of we had a gain and we didn't treat it as if it was the way that you would typically treat the regular money that's sitting in your bank account. It was like a total, like this money isn't even real or like, you know, it was just different. And I think that that really talks about this idea of whenever you have a loss, it's like super profound, but whenever you have a gain or you get something that you didn't really expect, you treat it completely different. And it's really kind of hard to understand why you do that. But I think it's something that, you know, humans are wired, this A to B reaction that you

Starting point is 00:56:14 react in that manner. So I guess the way that you can think about this from a different vantage point is whenever you get a gift card in the mail and you got a free $20 off, you're much more inclined to go ahead and use that because that was a $20. Maybe you weren't expecting to get it. It's kind of treated in the same manner. And, you know, go ahead, Colin. I see you have something you want to throw out there. Well, I just wanted to let you know as well.

Starting point is 00:56:38 That book that I sent you, it wasn't a late Christmas present. It was an early birthday present. Oh, there you go. Good recovery. Really good recovery. Yeah, not bad. One of the interesting things I found in this chapter was the concept of moving from abundance to scarcity. actually increased the positive reactions to this scarce object

Starting point is 00:57:03 as opposed to just this level of continued scarcity. And in the book they talk about a really simple experiment they did with cookies where they would have this jar of cookies and these subjects would be in the room having full access to, say, 10 cookies. Now, when the experimenters would come into the room and change that jar from 10 cookies down to two cookies, making them a scarce commodity, all of a sudden, when people would finally eat them,

Starting point is 00:57:34 they judge those cookies as tasting better as to being a higher quality, that they would pay more money for these cookies. So it was just a really interesting component that going from abundance to scarcity actually has a dramatic impact on how we perceive things that we will potentially purchase. So another really great part that Chaldine is making

Starting point is 00:57:56 is that when it comes, to, when it comes to scarcity, it actually is all about possession, or at least a lot of it is about possession. It's really about, you know, if I own these two cookies, I mean, I feel, you know, richer, I feel better. I mean, that's really the thing that we are aiming for. It's not necessarily that we like to eat cookies. It's just really, really nice that we possess that and other people don't.

Starting point is 00:58:21 So this is something that's really profound, especially when we're a competition with other people. And you can see, and I'm going to wrap this up here, because, that's pretty much the conclusion of our summary of the book. You can see how there are all these shortcuts out there that your mind has developed over time and everybody else's mind has developed over time. And you can see why Charlie Munger loves this book. And Charlie Munger is real big on psychology.

Starting point is 00:58:44 So he likes this book because it helped him identify and understand when am I being tricked? And what can I do in order to dig deeper to understand whether it's my mind using a shortcut, in order to make me react this way, or am I reacting this way because there's actually good reason behind my reaction for feeling the way that I feel? So, okay, we're at the point in the show where we're going to go ahead and play one of our questions from the audience. And I got to say, this is our first question from a female in our audience. And it's about time that we got a question from a female in our audience.

Starting point is 00:59:18 If you're listening to the show and you want to record a question, go to AsktheInvesters.com and you can record your question there. And if we play it on the show, you'll get a free sign copy of the show. the Warren Buffett accounting book like we're going to send to Nicole. So Nicole, great question and here it goes. Hey, Stig. Hey, Preston. First off, I just want to say thank you guys for all that you do.

Starting point is 00:59:38 The information you provide us is so valuable. I tell everybody about it. I love it. And just thank you. And I look forward to everything you guys do. So my question is, I recently went to a financial success class hosted by a community education organization in my city and they touched on investing. The teacher mentioned the book, the millionaire teacher, and that the book was the core

Starting point is 01:00:05 of her investing philosophy that she taught. So for the most part, I liked how the author gave the idea of investing based on your age, like if you're 25, invest 25% of your portfolio, which should be an index fund in bonds, and split the rest down the middle in U.S. stocks and international stocks. But what unsettling was their approach in regards to portfolio maintenance. They suggested selling your winners to make up for your losers and rebalance the portfolio so it maintains the correct percentage. What are your thoughts on this?

Starting point is 01:00:41 Wouldn't selling your winners be the wrong approach when you want to keep your winners so they grow and just sell the losers to get your portfolio percentage balanced. So, Nicole, fantastic question. I just love the fact that you brought this up. And I can tell by the way that you framed your question that maybe you should have been teaching some more in this class and helping some people out with their investing

Starting point is 01:01:06 because you're bringing up a great point. I really do not like whenever I hear people say the thing about the age and how they should have that percent in bonds and then the other percent in stocks. I really dislike that. And the reason why is because, like, right now, if you were recommending to somebody to have anything in bonds, I think that that'd be the worst advice that you could possibly give somebody. Interest rates are at all-time lows.

Starting point is 01:01:30 And if people are out there buying bonds and interest rates even tick up in the least amount, which that's the only direction they can go, you are going to lose an enormous amount of your principal if you go to resell those bonds. So that's horrible advice. Now, if the market conditions change in interest rates are high, well, then maybe you might even want more in bonds, but that's not the scenario that we're in today in 2015 in case you're listening to this in the future. So Stig, I see you have a response for Nicole, so go ahead. Yeah, and one thing I wanted to address, Nicole, it's the whole principle about rebalancing

Starting point is 01:02:03 your portfolio. I think that the soon as you come out and you talk about that you need to have, say, 30% in bonds or 40% in bonds, or stocks for that matter, I think that you're probably hitting the trouble. I don't think there's anything wrong with you. thinking about how old you are and if you need like dividend to like to stay in the way of living or anything like that. It's not like that. But you know, having a strict rule about having 40% in stocks or 80% in stocks or which country they're from, I think that you're making a big mistake. I think that you should always adapt your portfolio according to the market conditions. And even if you don't have the opportunity to acknowledge to follow the market, I definitely

Starting point is 01:02:48 and the thing, you should take another approach than just simply sticking to a rule about, say, 30% in stocks or 30% in bonds. I think that you're heading for trouble, and you should definitely adapt another strategy than that. And then you said this thing about, should I sell my winners? And you're completely right about that, Nicole. I mean, that really did make any sense to me. Because, you know, as you probably know, very often, at least in the long run, there's a reason why you see a price increase for a stock. That's because it's representative. it's a good company. So, you know, if anything, I mean, if you don't want to, like, make a third analysis of all your stocks, I mean, you should rather sell your losers and then buy more of

Starting point is 01:03:28 your winners. Because another thing is that, as you probably know, you have to pay capital gains tax every time you sell one your winner. So you're getting like, you're sticking to bad stocks, and then you have to pay more in tax. And that's a really, really bad strategy. So I'm really, you know, I'm really excited that you could see through that already. That's something that's really, really impressing me. Yeah, no, I totally agree with Stig. You're exactly right. I always related back to the business on Main Street.

Starting point is 01:03:58 If you had a great business on Main Street and it's just bringing in tons of cash, the last thing you're going to want to do is sell it. That makes no sense. And you know what? When you own stock, you own a proportional piece of a real business. And if that business is knocking them dead, why would you sell it? It makes no sense. So especially if you're paying capital gains tax.

Starting point is 01:04:20 That's all we have for you today. I know this was a long episode. Fantastic book. I highly recommend it. Stig, do you have anything? No. Read it, guys. Yeah, definitely read this one.

Starting point is 01:04:31 I want to throw out there that our good friend, Colin Yablonski's company, Inbound Interactive, really has helped us out with our search engine optimization for our site. If you own an online business, that is something that drives all your customers to your site and to your business. business. So if you're looking for somebody that's honest, somebody that you can trust,

Starting point is 01:04:51 somebody who has enormous amount of knowledge in this area, you're going to want to check out Colin's site. We'll have that in our show notes. We'll also send out the executive summary of this book for you. For anybody that's on our mailing list, they get these executive summaries of these books. Executive summaries like four or five pages long. So come and sign up on our list and you'll get these things for free. We only email people twice a month. We don't send any more emails and that because I hate getting emails like that. If it's not useful, I don't want it. So thank you for joining us, and we'll see you guys next week.

Starting point is 01:05:20 Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett accounting book. This podcast is for entertainment purposes only. This material is copyrighted by the

Starting point is 01:05:48 TIP network and must have written approval before commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 022 : Influence - The Psychology of Persuasion - Robert Cialdini's Book (Investing Podcast)

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