10-03-2020

FORCED COMPLIANCE BEHAVIOUR- FESTINGER AND CARLSMITH

 https://www.youtube.com/watch?v=8h27FuaUa7s

FORCED COMPLIANCE BEHAVIOUR- FESTINGER AND CARLSMITH

 People, when persuaded to lie without being given enough justification, will perform a
task by convincing themselves of the falsehood
Experimental Condition
Control One Dollar Twenty Dollars

How enjoyable tasks were -0.45 +1.35 -0.05

(rated from -5 to +5)

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 John tells Mary: '1 can't sell the stock now. I have to wait until it gets back
up to what I paid for it. Anyway, I don't realize a loss unless I sell. “

BUY MORE…

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BUY MORE…

KEEP IN MIND

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KEEP IN MIND

 We have to see the world as it is. Not for what it was or for
what we want it to be. Refusing to look at unpleasant facts
doesn't make them disappear. Bad news that is true is better
than good news that is wrong.
 Denial must be weighed against social, financial, physical and
emotional costs. When the cost of denial is worse than the
benefit of facing reality, we must face reality.

SUMMARY
1. Bias from mere association - automatically connecting a stimulus with pain or
pleasure; including liking or disliking something associated with something bad or
good. Includes seeing situations as identical because they seem similar. Also bias from
Persian Messenger Syndrome - not wanting to be the carrier of bad news.
2. Underestimating the power of rewards and punishment - people repeat
actions that result in rewards and avoid actions that they are punished for.
3. Self-serving bias - overly positive view of our abilities and future. Includes over-
optimism.
4. Self-Deception and Denial - distortion of reality to reduce pain or increase
pleasure. Includes wishful thinking

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BIAS # 6 BIAS FROM CONSISTENCY TENDENCY

Once we have made a choice or taken a stand, we will

encounter personal and interpersonal pressures to behave
consistently with that commitment. Those pressures
will cause us to respond in ways that justify our earlier
decision.

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CONFIRMATION BIAS

 The tendency to interpret new evidence as

confirmation of one's existing beliefs or theories.

 We look for evidence that confirms our ideas, beliefs, and actions.
 When we've made an investment, entered into a relationship, or made other types of
commitments, we tend to seek out evidence confirming that it was the right decision
and to ignore information that shows it was wrong.

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'1 don't want to sell this declining stock and face a loss. I put Rs100,000 into
this. I must prove to others and myself I made the right choice. “

EK BAAR JO MAINE COMMITMENT KAR DI……..

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 Assume you paid a Rs.250 non-refundable price for a movie ticket, but
you no longer wants to see the movie (your friend told you that the
movie is super boring).You feels you can't afford to waste the already
spent Rs. 250. Should you go to the movie because you already spent Rs.
250?
 The money is lost forever. Isn't it better to say that the already spent
Rs.250 is the cost of doing what you really wants to do? You can't get the
money back so it shouldn't make a difference whether you leave it or
not. The consequences are the same – the money has already been spent.
The choice is between having a good time or a lousy time.

'1 have invested 15 years of my life in this, so I won't walk away now. "

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 John and his family decided to buy a new car. They chose a dealership
that agreed to sell the car Rs. 50, 000 below the competition. Then the
salesman changed the terms. He had discovered an error. In the end,
the price ended up Rs. 10, 000 above competition.
 "What a great deal for a refrigerator, " Mary said, reading the
advertisements.

 "Will you take my kids to school today?" Mary's neighbor asked One month
later, Mary found herself still driving her neighbors' kids to school and even to
the movies.

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RIDING A TIGER

What started as a marginal gap between actual operating profit and the one

reflected in the books of accounts continued to grow over the years. It has attained

unmanageable proportions as the size of the company operations grew significantly.

At the end of the second quarter the company reported a revenue of Rs. 2,700 crore and an operating margin
of Rs. 649 crore (24 per cent of revenues) as against the actual revenues of Rs. 2,112 crore and an actual
operating margin of Rs. 61 crore (3 per cent of revenues).

 When people get us to commit, we become responsible.

 Once we make a commitment, we feel pressure from ourselves and
others to behave consistently with that commitment.

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FOOT-IN-THE-DOOR TECHNIQUE

Foot-in-the-door (FITD) technique is a

compliance tactic that aims at getting a person
to agree to a large request by having them
agree to a modest request first.

FOOT-IN-THE-DOOR TECHNIQUE

 In a study, 76% of a group of homeowners agreed to put a large billboard

on their front lawn, saying "Drive Carefully." Two weeks earlier, the
homeowners had been approached by other researchers, asking them to
place a tiny sign saying "Be a Safe driver" on their car windows.
 Compliance with small request increases chance of compliance with
larger request later

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“GROW THEIR OWN LEGS”

 People add reasons and justifications

to support the commitments they
have made even if they are placed
there through manipulation, or if the
initial agreement is revoked or
changed.

Other SMART people do it so it can’t be

all that bad

This 112-year-old woman's secret

to long life is chain smoking

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STRONG CONVICTIONS CAN BE DANGEROUS.

 Intense commitments for political, religious or

philosophical ideas create an ideological bias.

 Ideology is a form of commitment and consistency.

 You will always looks for evidence that favours your ideology. If
you come across a disconfirming evidence you get into
cognitive dissonance.

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Researchers selected people who either favoured or opposed capital

punishment and asked them to read two scholarly, well documented
articles on the emotionally charged issue of whether the death penalty
deters violent crimes. One article concluded that it did; the other that it
didn’t.

IS COMMITMENT/CONSISTENCY BAD?

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 Inconsistent Behaviour Can Cause Accidents

Avg. Test ODI T20

Rahul Dravid 52.31 39.17 31

Virendra 49.34 35.06 21.89

Sehwag

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TIME HORIZON AND RISK

COFFEE CAN INVESTING*

 Minimum market capitalization of 100Crore

 ROCE: 15%
 It measure the efficiency of capital deployment, calculated as a ratio of EBIT in numerator and
capital employed (sum of debt liabilities and shareholder’s equity)
 The higher the ROCE, the better is the company’s efficiency of capital deployment
 Filter of 15% (bare minimum return required to beat cost of capital)

 Revenue growth: 10%

Company Name Median S Growth Median ROCE Share Price (1 jan 2013) Share Price (jan 2018) CAGR (5 years) Share Price (10 jan 2019) CAGR (6 years)

 India’s nominal GDP growth rate has averaged 13.8% over the past 10 years
Motherson Sumi Systems Ltd. 24.62850439 15.985 59.24 252 33.58% 162.3 18.29%
Pidilite Industries Ltd. 19.16840603 21.85 230 902 31.43% 1110 30.00%
Marico Ltd. 15.42598441 21.32 112.45 328 23.87% 387 22.87%
Hindustan Unilever Ltd. 12.6214028 82.32 475 1350 23.23% 1793 24.78%
Godrej Consumer Products Ltd. 21.87066316 32.175 363 666 12.91% 778 13.55%
Asian Paints Ltd. 21.99419966 40.59 448.85 1184 21.41% 1397 20.83%
Sun T V Network Ltd. 22.14261328 27.55 439 1038.75 18.80% 597 5.26%
Divi'S Laboratories Ltd. 27.63852123 26.055 527.55 1110 16.04% 1501 19.04%
Hero Motocorp Ltd. 16.88494363 39.81 1790 3740.55 15.88% 2933 8.58%
Tech Mahindra Ltd. 12.60265464 19.525 252.76 519 15.48% 695 18.36%
G A I L (India) Ltd. 20.8455056 18.195 254.25 372 7.91% 342 5.07%
Nestle India Ltd. 21.28810978 100.3 4659.95 7860 11.02% 11230 15.79%
Colgate-Palmolive (India) Ltd. 14.72003614 108.78 680 1109 10.28% 1312 11.58%

Sensex 19300 34100 12.06% 36197 11.05%

*Non financial companies

RBI House Price Index (Q2 2010=100) 160.8 252.1 9.41% 259.5 8.30%

Gold (22c, 10g) 28270 30300 1.40% 32700 2.46%

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KEEP IN MIND

 The business of not drifting into extreme ideology is very, very

important in life. If you want to end up wise, heavy ideology is very likely
to prevent that outcome.
 ''A man should never be ashamed to own that he has been in the wrong,
which is but saying, in other words, that he is wiser today than he was
yesterday.“- Jonathan Swift

KEEP IN MIND

 If we can get people committed in advance, they tend to live up to their commitment.
For example, make people take a voluntary and public position on some issue.
 Assume I never invested in this stock and it was presented to me for the first time,
would I invest in it today?
 "Facts do not cease to exist because they are ignored," If we only look to confirm
our beliefs, we will never discover if we're wrong.

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EXPECTED UTILITY THEORY

E(x)=∑xi P(xi)
 A predicted value of a variable, calculated as the sum of
all possible values each multiplied by the probability of
its occurrence.
 Foundation of rational agent model

BERNOULLI UTILITY FUNCTION

Equal chances to have 1 million or 7 million

Or
Have 4 million with certainty

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FLAW

Kay and Maria, get their quarterly returns on their stock portfolios.
Kay learns her wealth has gone from $3 million to $5 million, and
Maria learns her wealth has gone down from $7 million to $5 million.
Who is happier?
Who is better off financially? (Do they have the same utility?)
Bernoulli's analysis was in terms of who is better off financially--
basically in terms of wealth.

IMAGINE

You are sitting at your work desk when your boss comes and
offers you the following deal

a bonus in the following manner:

A fixed bonus of 10lac and variable bonus in following manner
a) Sure Rs 5 lacs
or
b) Flip a coin. If it’s heads, you get Rs 10 lacs and if its tails, you get zero.

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NOW CONSIDER THIS

This time he offers you a bonus of Rs 20 lacs for the year (credited to you’re a/c).
From this Rs 20 lac,
a) You can give him Rs 5 lac back, no questions asked.
Or
b) You can flip a coin. If it’s heads, you ‘give back all the Rs 10 lacs and if it’s tails, you
don’t have to give back anything

The reason you like the idea of gaining Rs. 5 lac and dislike the idea of losing Rs.
5 lac is not that these amounts change your wealth. You just like winning and
dislike losing —and you almost certainly dislike losing more than you like
winning.

People become risk seeking when all their options are bad.

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PROSPECT THEORY

 https://www.princeton.edu/~kahneman/docs/Publications/prospect_theory.pdf

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