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Robert Abbott
Robert Abbott
Articles (801)  | Author's Website |

Book of Value: Purveyors, Victims and the Stock Market

A look at mass persuasion and how it may affect all aspects of our life, including investing

March 11, 2020

Investing is not just about the math. It’s also very much about the emotions, opinions and beliefs of the investor.

In chapters four and five of “Book of Value: The Fine Art of Investing Wisely,” Anurag Sharma continued to build his case for a human approach to investing. In his view, the academic finance approach, with its emphasis on numbers and caricatures, is quite sterile and inadequate.

As a result, he committed chapter four to telling us about two purveyors of what he calls the "dark arts” of the investing world, Gustave Le Bon and Edward Bernays. He also describes the ideas of one prominent critic, Vance Packard.

Le Bon, influenced to some degree by Charles Darwin’s “On the Origin of Species,” wrote his works in the late nineteenth and early twentieth centuries. Like many French intellectuals of the period, Le Bon had an elitist’s belief that groups of people could be turned into dangerous mobs by skilled rhetoric and manipulation. Thus, he felt the ruling elites needed to understand mass persuasion so they could maintain social order. For him, the keys to mass persuasion were “affirmation” and “repetition.”

Bernays was a follower of Le Bon, a nephew of Sigmund Freud and the author of two famous books on persuasion, “Crystallizing Public Opinion” (1923) and “Propaganda” (1928). This American combined the ideas of Le Bon and his uncle. Sharma wrote that he “turned the manipulation of the masses into a highly successful art form that is to this day widely practiced and now deeply institutionalized in many parts of the world.”

Packard, also an American and a critic of devious manipulation, published “The Hidden Persuaders” in 1957. This book was meant to expose how the social sciences were being exploited in the service of often-dubious persuasion methods. It was very popular because, as Sharma put it, the author's words connected with a pervasive sense among people that something wasn’t right. His work, too, was influenced by the psychoanalytical work of Freud.

To Sharma’s list, I would add the name of Dr. Robert Cialdini, the author of “Influence: The Psychology of Persuasion.” Published in 1984, this book has been a source of ideas for modern marketers, including the now-ubiquitous Internet marketers. Cialdini's six principles of influence/persuasion are reciprocation, commitment and consistency, social proof, liking, authority and scarcity. Almost every ad you see today will include one or more of these six principles.

As he wound up chapter four, Sharma emphasized that mass persuasion has become an integral part of modern cultures and economies. As media channels have expanded since Packard’s book was published in the 1950s, so too have vehicles of mass persuasion. The purveyors of persuasion are coming at us constantly.

In chapter five, Sharma turned to the victims of both one-on-one and mass persuasion. He noted that we are all subject to visceral impulses. For example, if we really need food, for example, then we are willing to go almost any length to get it. He cited the work of George Lowenstein, a professor of economics and psychology. Lowenstein identified three effects of strong visceral urges: the urge to satisfy them, the urge to satisfy them immediately and the vanishing of these urges as quickly as they arrive once the need is met. The most well-recognized visceral factors include hunger, thirst and sex. To this list, Lowenstein identified anger, fear, greed, envy and extreme sadness as visceral emotions.

Combine these factors with psychological “obstacles” such as belief persistence and confirmation bias and we have biological inclinations that work against us when we make decisions. Sharma pointed to a Federal Trade Commission (FTC) study from 2005 that found 13.5% of Americans reported that they had been victims of fraud.

He added that one common form of fraud, Ponzi schemes, often use essentially the same method, which is to evoke greed by promising very high returns with no risk. Such was the case with Bernie Madoff, who was able to swindle sophisticated investors, including hedge fund managers and European royalty, by the usual means. He promised steady but moderate returns with little risk and gained their trust thanks to greed and lack of due diligence.

Another report from the FTC, this one from 2009, listed the most common tactics of fraudsters. They included a “phantom fixation," which involves telling victims and potential victims that they have won a really big prize. That sets the hook, thanks to the emotions of hope and greed, and discounts logical reasoning.

Another tactic was the idea of scarcity (also one of Cialdini’s triggers), i.e. the “Hurry, only five copies left” tactic that causes us to ignore our rational thoughts. The third major tactic was to gain some sort of credibility, which was one of the ways Madoff managed to swindle his victims. Fourth, fraudsters offer comparisons which, while misleading, can still provide anchors or benchmarks in victims' minds. Fifth, they provide social proof of a sort by claiming something along the lines of "many others have already bought this product/service, so there’s no need for you to evaluate this fine offer." To top off such shady techniques, fraudsters push for immediate action.

Not surprisingly, investors act like other consumers and thus make mistakes. Sharma cited the work of Brad Barber and Terrance Odean, who found that investors make many systematic mistakes. For example, they found many individual investors only buy stocks that have grabbed attention in some way, perhaps those that are in the news or being promoted. Because investors have a strong tendency to avoid regret, they sell their winners too soon and hold their losers too long.

All in all, Sharma has made a convincing argument that “visceral factors” affect us, both by our own hands and at the hands of others. This sets the stage for what he calls “a conceptual framework for countering our many biases and vulnerabilities so that we may become better investors.”

Conclusion

In an earlier chapter, Sharma referred to his Visceral Market Hypothesis, which is the opposite of the Efficient Market Hypothesis. The latter pays scarce attention to human emotions when considering investments. A visceral market hypothesis, on the other hand, would put our human side first.

In chapters four and five, the author illustrates how emotions and visceral impulses allow others to manipulate us, and even allow us to manipulate ourselves. In doing so, he has shown the relevance and power of the field of behavioral finance.

To that, I would add that mass persuasion has become so embedded in modern society that it is almost invisible thanks to its pervasiveness. But, by being aware of its existence and how it might mislead us, we can become better armed for investing decisions. Being forewarned is being forearmed.

Disclaimer: This review is based on the book, “Book of Value: The Fine Art of Investing Wisely”, by Anurag Sharma, and published in 2016 by Columbia Business School Publishing. Unless otherwise noted, all ideas and opinions in this review are those of the author.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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