In my previous article, I discussed how we could apply a few human psychological tendencies from Charlie Munger (Trades, Portfolio)’s human misjudgment framework to J.C. Penney (NYSE:JCP)’s failed turnaround plan laid out by Ron Johnson. In this article, I will further apply a few other tendencies to J.C. Penney’s fiasco under Johnson. Again, all the credit goes to Charlie Munger. Without him, this article would never have existed and I would have been deprived of much of the ignorance removal privilege now I enjoy everyday.
4. Contrast-Misreaction Tendency
“Because the nervous system of man does not naturally measure in absolute scientific units, it must instead rely on something simpler. The eyes have a solution that limits their programming needs: the contrast in what is seen is registered. And as in sight, so does it go, largely, in the other senses. Moreover, as perception goes, so goes cognition. The result is man’s Contrast-Misreaction Tendency.
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- JCP 15-Year Financial Data
- The intrinsic value of JCP
- Peter Lynch Chart of JCP
Contrast-Misreaction Tendency is routinely used to cause disadvantage for customers buying merchandise and services. To make an ordinary price seem low, the vendor will very frequently create a highly artificial price that is much higher than the price always sought, then advertise his standard price as a big reduction from his phoney price. Even when people know this sort of customer manipulation is being attempted, it will often work to trigger buying.”
The fatal assumption in Ron Johnson’s fair and square pricing strategy is that consumers are rational and therefore, when you get rid of all the pricing games, they will buy more because they know exactly what the fair price is. I still have a hard time believing this strategy came from a retail veteran. J.C. Penney’s long-time customers were so used to the old system of coupons and aggressive seasonal sales that were part of he J.C. Penney brand. While the fair and square pricing strategy in theory would lower customers’ purchase price, in practice, J.C. Penney’s customers argued that the departure from coupons has created a more expensive and less enjoyable shopping experience. By removing the anchor price, J.C. Penney made its customers more confused than ever. Johnson essentially tried to reinvent human nature and boy, was that a good lesson in life.
5. Deprival Superreaction Tendency:
“A man ordinarily reacts with irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status, or any other valued things.”
In a more subtle sense, Johnson’s fair and square pricing strategy also triggers the Deprival Superraction Tendency. If you ask a typical J.C. Penney’s long-term customer what they like about the brand, or what value they see in shopping at J.C. Penney, that customer may very likely tell you it’s the endless good old promotions. Now imagine the excitement of that customer when they saw J.C. Penney’s coupons in her mailbox every week. Then imagine one day she found out that the coupons and promotions are gone, and what’s left is the cold fair and square price. By taking away coupons and promotions, Johnson also took away the joy that J.C. Penney’s customers got when they
- Saw the coupon.
- Planned to use the coupon.
saw the coupon
- Actually used the coupon.
Combine Deprival Superreaction Tendency with the Contrast-Misreaction Tendency, we have a superpowerful mini-lollapalooza effect.
6. Doubt-Avoidance Tendency
“The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do. And so man’s Doubt Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.”
Johnson’s Doubt-Avoidance Tendency is demonstrated by the speed at which he executed his transformation plan. For a century-old brand such as J.C. Penney, any kind of major transition will have pros and cons. I’m not a retail expert but it seems to me that radical changes in a traditional retail chain should be made gradually, rather than in fast spurts. He changed J.C. Penney’s logo merely three months after becoming the CEO. Shortly after he revealed the new pricing strategy. By the end of 2012, hundreds of J.C. Penney’s stores were revamped. This speed of execution is more than aggressive.I suspect that it is the Doubt-Avoidance Tendency that made Johnson execute his plan as fast as possible. After all, the longer it takes to execute, the more doubts there will be.
7. Inconsistency-Avoidance Tendency
“The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance. We see this in all human habits, constructive and destructive.
It is easy to see that a conclusion triggered by Doubt-Avoidancy Tendency, when combined with a tendency to resist any change in that conclusion, will naturally cause a lot of errors in cognition for modern man.”
“I choose to inspire and create believers. I don’t like negativism. Skepticism takes the oxygen out of innovation.”
- Ron Johnson
According to Fortune Magazine, “Johnson displays the sort of enthusiasm and unwavering commitment that inspires followers.” Anybody who expressed doubt to Johnson’s plan was promptly and duly removed from his sight. Fortune cited the example of J.C. Penney’s former Executive Vice President Steve Lawrence, who suggested that Johnson should conduct a test before eliminating price promotion from one day to the next. When a decision was made to reduce the top merchants from two to one at the end of February, it was Lawrence who was cut than another executive Liz Sweney, who publicly supported the new plan.
While displaying Inconsistency-Avoidance Tendency at the early stage of his tenure, Johnson publicly admitted his mistakes and changed the strategy. I think we have to give Johnson credit for this. It is extremely hard to acknowledge you’ve made some pretty big mistakes in public. It’s also very difficult to essentially undo what you have done. Too bad it was too little too late for Johnson.
Putting It All Together
J.C. Penney’s struggle under Johnson’s leadership is a great example of the Lollapalooza Effect Charlie Munger (Trades, Portfolio) taught us: Extreme consequences can happen due to a confluence of psychological tendencies acting in favor of a particular outcome. Johnson’s lessons are also our lessons. It’s amazing to me how by putting everything together just utilizing Munger’s Human Misjudgment Framework, we can see Johnson’s efforts were doomed from the beginning. Yet it took the market a year and half to recognize what Munger and Buffett could see in probably 30 seconds. I have enormous respect for Bill Ackman (Trades, Portfolio). I think he is unfairly discredited for his investment in J.C. Penney, Borders and Herbalife. At the same time, I really feel the mistake of J.C. Penney could have been completely avoided if he followed Munger’s framework and kept his ego in check.
Of course, Ron Johnson and Bill Ackman (Trades, Portfolio) were not the only victims of the J.C. Penney fiasco. J.C. Penney’s customers, employees and shareholders all suffered. I am deeply saddened by the fact that an avoidable multi-billion dollar mistake has made life worse for so many people. But unfortunately, ignorance removal in basic human psychology, a seemingly simple task, will not be easily achieved.
It seems appropriate to end this short article series with the lesson from the master itself:
“No wise pilot, no matter how great his talent and experience, fails to use his checklist.”