Stig Brodersen  10:23  

I think I learned a lot and I learned a lot about Calin, to be honest, because after I got this book, we invited him two or three times, Preston. 

Preston Pysh  10:33  

Seriously, this stuff works and Calin is a perfect example. He’s really blushing right now. 

Calin Yablonski  10:39  

It was great.  I have to say, I think after I sent one book to Stig he actually sent me two books back in the mail. 

Stig Brodersen  10:47  

Oh, geez. Yeah, I definitely did that. I didn’t think of it but yeah, that’s scary.

Preston Pysh  10:54  

Alright, keep going. We are ridiculous.

Stig Brodersen  11:00  

I think that the principle of reciprocity, that was probably the most valuable chapter, at least for me. We probably all know the situation. If we like a service from a waitress, who has really shown a good service, then we are probably inclined to tip her more. If we get free samples for a product, we are probably inclined to buy products for that company. 

This happens all the time for all of us. It’s really a strong rule that I think that everybody subscribed to, probably no matter what they’re saying. 

What I found that 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.

For instance, I like Calin. 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 that if you don’t like the person, you actually feel at least as much obligated to repay that debt properly because you don’t want to feel like you owe that person anything.

Preston Pysh  12:14  

I really like the example Cialdini used in the book for this one. Je talks about this gentleman and this lady. The lady’s car broke down and this gentleman came over. He really helped her at the end of the work day. He came over and helped her get her car started and saw her on her way.

Cialdini 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, and 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. But yet, the Law of Reciprocity was so strong, that it kept her interest in keeping him in the company there, regardless of whatever their circumstances were. 

I really thought 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. 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, 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, it could be any type of act. 

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. 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 conducted immediately. 

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 and 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 immediately. It comes straight back. Then other times, I’ll just have these random events that happened years later and I’m just like, I think that that was a balancing of something that I did a long time ago. 

Those are my personal opinions. Some people might think that that stuff’s crazy. But I just want to throw that into this section because Cialdini is talking about how reciprocation occurs. I think a lot of people immediately think that it has to happen right now, or it has to be monetary. It is not. Just something I want to highlight and just throw out there.

Calin Yablonski  15:44  

It’s funny that you bring that up, Preston, because I used to think the same way about things like karma. It seemed 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, that’s basically just fulfilling that karmic cycle. 

Now, another thing that I wanted to talk about was how reciprocation can be used by what Cialdini calls “compliance practitioners.” That’s that reciprocation typically isn’t a one to one relationship. It actually creates a feeling of indebtedness, in some cases to the person. 

The example that they use in the book is talking about the Hari Krishna, I think I’m pronouncing that correctly, the Hari Krishna sect. They were a sect that had attempted to collect donations. And so, they would have these really large extravagant showings at airports and things like that, but it wasn’t effective in actually receiving any type of monetary return. They made the shift towards giving somebody a passer by a random person in the airport a flower. 

They would give this person this little fake flower. They’d stick it in their hand, or they button into their lapel, and the person not really knowing what was even happening, would receive this flower. 

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. They typically would then give them $1 or $2, or something like that. It dramatically increased the amount of money that this organization was generating.

Preston Pysh  17:35  

So the one thing that I can say, Calin and Stig, that I really liked about the book was the fact that Cialdini backs up every one of his claims with just a ton of scientific proof. You briefly mentioned Calin. He will provide example after example of, “Hey, we ran this study on 100 people, and then this is what happened.”

Then he provides examples like the one that I described and he really backs up all of his claims with proof, like hard quantifiable proof. That’s one of the reasons I think that I enjoyed the book so much. I can understand why Charlie Munger rates it as his number one book.

Stig Brodersen  18:17  

This is really just something to listen to out there because I think a lot of people listen to us and in the field, what a lot of great anecdotes… and they might not be thinking, “Well, is that really how it works like real life?” It really is. I mean, Cialdini is really a smart guy. He’s a PhD and a professor. He really knows what he’s talking about. 

I think that the difference probably is that he’s also a good storyteller so every time that you found a good relation of, if this happens, it’s because of this, he can also always back it up with an enjoyable story that we can all enjoy. For that story about Hari Krishna  I do remember how Hari Krishna got more flowers to do the same trick over and over again.

Calin Yablonski  19:04  

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. The sect would actually follow up, grab the trash can, pull out the flowers, and then they would cycle through again.

Stig Brodersen  19:21  

Yeah and that just really shows that the flower had no value whatsoever. It was the whole process of handing it to another person and feeling indebted. That was really making the difference here.

Preston Pysh  19:32  

Okay, so the next thing that Cialdini talks about and this is in his third chapter. He talks about commitment and consistency. I really like this chapter. I have a story from yesterday that I’m going to bring up to talk about to demonstrate this principle that he has. 

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.  I’m 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 and pay for it somewhere else. I kind of found out about this because I actually came back from another trip that I was on this week. I just came home and I saw that the oil needed to be changed. 

I called up the car company and I tried to have them get me in at the last minute. I called up this lady and she said, “Well, you have to get a manager to do a last minute oil change. I understand you’re going on a trip.”

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. I’d really appreciate it. It’s my fault that I’m asking it 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.” 

I bought the car and the next day I got in there. The girl checked the car in to do the oil change. My wife and I left because they had to keep the car for a little bit. My wife and I left in another vehicle. As soon as we’re driving away, I get this call back from the lady. She said, “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.”

I said to the lady, “I really need some help.” I described what my problem was and she wasn’t budging. Then I said the magic word. I said, “Well, 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 in that you guys would do it.” 

As soon as I said that, she said, “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.” That was it. Like that was all it was. It goes straight to the heart of this principle of commitment and consistency. 

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. They didn’t want to go back on a commitment that they had made. 

In Cialdini’s book, he talks about telemarketers calling your house. He says one of the first things that a telemarketer will say to you is, “Hey, how are you doing today?” What the telemarketers are 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, “I’m doing pretty good.” So that’s the first level of commitment. You had consistency, you had commitment. Then they ask you the next question. They slowly work you into a position where next thing you know, you’re buying life insurance that you didn’t even need, because you already have it or something like that. 

That’s really the principle that he’s talking about here. Stig, did you have any points that you wanted to add on this one?

Stig Brodersen  22:52  

Okay. This is another great example from the book. I think this is an example that a lot of parents can recognize. 

What is happening is that we buy more toys around Christmas. That probably comes as no surprise, we buy and love toys. What the *inaudible* factors, their problem is that we stopped buying toys after Christmas. Yes, that makes a lot of sense, but they actually found a way to work around that problem. 

What they’re actually doing, and this is really incredible, but what they’re doing is that they’re marketing specific toys before Christmas. Then they’re under supplying that toy. 

Now you might be thinking, why would there be an under supply? Why would they advertise for a product and then undersupply it? But the thing is that all the parents run out to the toy stores looking for this toy. They can’t find it so they buy another piece of tor for their son or daughter just before Christmas. 

But since they have promised their kids this specific toy before Christmas, they have to go back into the store like one month later and pick up the toy again. With this very, very neat little trick, it actually doubled the sales of toys, just because the parents have committed to something and they want to be consistent. 

Calin Yablonski  24:07  

Yeah. The other component of this that I found really interesting is how it talked about building on small commitments and then building them up to larger ones. 

My favorite example of this is people, typically politicians, that will first come to you and say, “Hey, do you support XYZ cause?” It could be slowing down traffic in your neighborhood or something like that. You, just being a good person, say, “Yeah, 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 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. 

It’s such an interesting process, because the other component of it is that the more public the step that you take, the more reluctant you are to actually change it.

Preston Pysh  25:05  

I love this part of the book. I’m probably going to mess it up a little bit and may be read differently from how other people read it, but it went something like this and it hits on the point that Calin brought up. Cialdini 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. 

Then they came back and they asked the people to put up this monstrous sign like one that was just awkward, and something you had never put up in your yard. Because people had made the smaller level of commitment to the smaller sign, they felt like they were part of this movement. 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. It was probably the most embarrassing thing ever. 

However, in order to protect their consistency, they put the sign up anyway. It was a very high percentage, like a percent that was kind of mind blowing. He had this in a study.

Calin Yablonski  26:06  

What I found really interesting about that is that it is so closely connected to our perceptions of ourselves. When we make a small commitment to say, “Hey, I actually support people slowing down in my neighborhood and I don’t want drivers to speed through our neighborhood. I’m going to take a stand on that,” it actually changes our self image and our identity at a certain level. That’s why we feel so compelled to stay consistent with our initial commitments.

Preston Pysh  26:35  

This is where I really found the this whole point really profound: Cialdini 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 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. 

However, 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. 

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.

Stig Brodersen  27:27  

Yeah, I’m really sorry, guys, I always know how to relate this to stock investing. Now I thought the minute I read this, I think it was Mohnish Pabrai who said, and if he wasn’t, I’m sorry, Pabrai. 

I think it was Pabrai who said that he would never tell the public when he bought a new stock unless you really had to. People are sometimes required to disclose that they have the holding company… But he would not say that, because he felt more obligated to keep investing in that company, even though if he was wrong, he would not sell that stock because since it was now in public, he would seem inconsistent. He was shy about it, because he knew that he could not act rationally if he was telling everybody what she was doing.

I think that we can probably all relate to that one way or the other. 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.

Preston Pysh  28:26  

Yep, totally agree. It kind of plays into the next chapter: social proof. I really liked the example that he had for this one. We were actually briefly talking about this before we actually started recording. 

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. This gentleman was standing on the sidewalk and he’s just looking up, he’s doing nothing more than just looking up. 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. 

You talk about a scenario that totally relates to stock investing. I mean, you can’t get a better scenario than this. So this gentleman is 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. They have four people looking up all kinds of things in the general area. 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 astronomical, every single person looked up to see what was up there. 

You talk about a scenario that really relates to investing or just your everyday life. Whenever you see a large crowd of people doing something, the immediate inclination is “I need to be doing it too.” I think it’s definitely driven by just our inherent nature of survival that drives this A to B reaction.

Stig Brodersen  30:07  

Yeah, I completely agree with you, Preston. I also think it relates to being uncertain and having insufficient data. I have to say very few people really understand 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’re talking to your colleagues about stock investing. 

So if you hear that everybody else is pouring money into the stock market, you don’t look at the hard data and think, “Well, should I invest or not?” You’re thinking, if everyone else is doing it, and because you don’t have sufficient information to make an informed decision, then you just tend to do the same as everyone else. I think that’s really something I can see for myself, perhaps not in stock investing. 

However, everyone is ordering the same thing at a restaurant where I’ve never been before, I might just be a pushover. I ordered the same thing. I think it’s a really strong thing. 

Calin Yablonski  31:03  

Actually, I wanted to build on one of the subsections of social proof, which Cialdini calls pluralistic ignorance. 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. 

I know this takes that 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. 

The example that he gives in the book is of a lady named Kitty Genovese. She was actually, to set up the story, she was being attacked. 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 by-standers were around just watching this attack take place. 

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 extremely interesting. 

I’ll take the next chapter. The next chapter is the liking principle. The principle that we prefer to say yes to people that we like, as opposed to people that we don’t. Again, a really, really interesting concept, one that I don’t think most people are aware of. 

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 to sell you overpriced Tupperware containers. 

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 or maybe they’ve done something nice for them in the past. 

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 have things like commitment and consistency with this person who has been really great to me in the past, and they’ve done things for me in the past so why wouldn’t I go? 

There’s social proof, because, “Hey, all of 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 would 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.

Stig Brodersen  33:49  

Well, one thing I really liked about the book, and I think that was really important that Cialdini included in the book was that how do you say no. I mean, if you experience something like social proof, or if you like a person, how can you say no, and make it like a rational decision? 

What he’s saying is that 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. I’m not really saying that you shouldn’t go to Tupperware parties. By all means, buy that piece of Tupperware if you need it or not.

However, just thinking about this in terms of making a decision is because unlike the person perhaps the sales personnel or it’s because I need the product, so if you can make that connection. You have a thing that you shouldn’t be too intimidated to enter a store again.

When I read this book, I was like, “I would never go shopping again because there are so many neat examples…”

Preston Pysh  35:00  

Oh, the one thing I wanted to throw out there, Joe Girard, he’s known as being the number one car salesman of all time. This liking principle, Joe Girard was brought up, because he would send out these postcards to people that had purchased cars from him. He had sent them out every single month.

On the postcard, it wouldn’t say anything more than I like you. 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’s like sending your postcards every month saying he likes you and whatever else. It just really kind of shows the impact and the power of that principle, which is the liking principle. 

The next chapter talks about authority. I like the example that he had in this chapter. The example went like this. So he had some, some boys and the boys were younger, I would say, under the age of 10. They brought these boys into a room, and they had three toys for the boys to play with. 

One toy that was very desirable was like a robot and then the other two toys were not very desirable. They’re probably like one Lincoln log or something like that. 

What happened was this gentleman would come, this authority figure would come in, and he would look at the boys, the individual boys, and they ran this experiment a bunch of times to collect data. 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.”He really didn’t provide any reason why. He didn’t say because or anything, he just said you are not allowed to play with this toy.

Then the gentleman would leave and then they would watch 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. 

This is where the experiment got really interesting. So what they did is they went back, and then 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. 

The boys now have the decision to play with whatever toy they want. They wanted to see the impact of how that man influenced the boys over the long term. What they found was that 70% of the boys went immediately to the robot after they had more time and this gentleman was not involved. 

Okay, so the impact in the authority and the influence that this gentleman had was literally nothing over the long term. He only had short term authority and influence. 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. He ultimately left the decision up to the boys to make their choice of whatever they wanted to do. He put it in a position that the child was actually making the decision of whether he was going to play with it, as opposed to the authoritative figure making that decision for them. 

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. However, here’s where it was different, that his influence continued to progress with the time element. 

When the boys went back in there, they still did not play with the robot toy. This was like the same number that they had on the short term. 70% of them still didn’t play with the robot toy because the child at that point had made the decision. 

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 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 have been telling them to do. 

Cialdini relates us to the fact that they were being forced to not do something like, “Hey, you are not allowed to drive your car” with no reason there’s nothing attached to it. And so, because of the reaction and the way that they were being influenced was that they actually do the exact opposite. 

Cialdini 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 got to explain it. You have to make the child almost feel like it’s their idea or their opinion that they’ve arrived at that decision. Then it will be a lasting influence. 

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, I think leadership could really play into this, if you’re trying to direct. I’m bossing 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. 

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.

Calin Yablonski  40:55  

Another interesting section in the authority chapter was the Milgram experiment. This is a really famous experiment that happened in the 60s or 70s. 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. Now the student was asked a series of questions. 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. 

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. 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, and as the student kept getting the questions wrong, he would scream out in pain. He would say things like, “I have a heart condition. Please stop this.”

Every single time because the authority figure would say, “Apply that shock,” the teacher would continue to do that. At the end of the chapter, they talk about what the psychologists thought would be the result of this. They thought that something like one in 1000, 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. 

What ultimately happened is that something like 65% of people, when they were told by an authority figure to continue to apply voltage, they did so. It was just a really powerful experiment. 

Stig Brodersen  42:47  

This relates to the next book that Preston I read, which is “Outliers” by Gladwell. But in that book, he’s talking about power distance, or a concept he calls power distance. I think that’s something that’s really interesting here, because I’m sure some might be thinking, “I would never do that. I would never hurt another person because authority tells me that I have to.” I have to stress that no one was harmed doing these experiments at all.

What I really want to talk about is power distance. So this is really a cultural thing. You have some countries that have a high power distance, like Guatemala and the Philippines.

In these countries, you cannot just say I am not going to do that, because of the way you were 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 US, which is like in the lower middle part of the power distance index. This experiment was conducted in the US, and even now power distance is not that vast in the US. People would still harm the participants in the experiment. I think that was really frightening.

Preston Pysh  44:07  

Stig brings up a great point. He talks about 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. 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 an assistant and bring up maybe an *inaudible* because of this authority figure setting that they had. 

Anyway, we’ll talk about that more when we talk about Gladwell’s book but it has really great points, because it definitely hits on this point that Cialdini is talking about with authority. 

The last point that we’ll talk about in this book was the scarcity principle. Cialdini brings up a fantastic example that really kind of made me smile. Cialdini is from Arizona. That’s where he teaches at the University of Arizona. He talks about how there was a new Mormon church built in that local community there.

What they do when 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. It’s only for a limited time. They can only see it for about a week. It’s published in the newspaper. That’s how Cialdini saw it. 

It says, “This will only be a limited viewing. People from the outside can only come and see this for a limited time. 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. 

Cialdini is 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 and unique. 

He started studying, why am I drawn to this? Why do I want to go and see this so badly? It had to do with this idea of scarcity, 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. They’re totally influenced by it and that they want to go see it. 

Cialdini says, “At the end of the day, I had no desire, if this was open to me, you know, at all times, like I could go into this church anytime I wanted to, I would probably never go and see it. However, 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. It wasn’t something I was even interested in.” 

I found that to be really interesting and a great example to highlight how this chapter of the scarcity ideas is impacting people in their everyday life.

Stig Brodersen  47:05  

Just in the connection, I had to talk about stocks again. But what Cialdini is saying is that we tend to react more to losing than the potential benefit. I think that’s something that’s really profound and something that you can see a lot when it comes to stock investing. 

When it comes to stock investing, do you think a lot in terms of what we can lose? We’re not that interested in what we can gain from it. I think this example with the Mormon Church is great because you only had like one week where you could go and visit this church, even though you probably didn’t want to see it in the first place. But just because you had the potential to lose, that did the trick.

Preston Pysh  47:49  

I personally act differently whenever you come across the windfall, or something that you didn’t necessarily earn or try to get. Let me give you an example. This past Christmas, my wife and I were actually… It was our birthday gift, because our birthdays are right after Christmas. 

My parents gave my wife and I 250 dollar gift cards to a restaurant called Bonefish. My wife and I went out. We got a babysitter to watch the kids. We go out to the restaurant and we’re sitting there. We were just ordering stuff that we normally would not order, like every appetizer, desserts, we were getting all these. We went all out. We normally wouldn’t do that. We’d probably just kind of have a nice meal and not spend $100 on the two of us, but we went out and did that. 

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 this money isn’t even real. It was just different. I think that really talks about this idea of whenever you have a loss, it’s super profound, but when you have a gain, or you get something that you didn’t really expect, you treat it completely differently. It is really kind of hard to understand why you do that.  

I think it’s something that humans are wired with this A to B reaction that you react in that manner. 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 $20 it maybe you weren’t expecting to get it’s kind of treated in the same manner. 

Calin Yablonski  49:38  

Well, I just wanted to let you know as well that that book that I sent you, it wasn’t a late Christmas present. It was an early birthday present. 

Preston Pysh  49:46  

Oh, there you go. Good recovery. Really good recovery.

Calin Yablonski  49:50  

Yeah, not bad. One of the interesting things I found in this chapter was the concept of moving from abundance to scarcity to actually increase the positive reactions to this scarce object, as opposed to just this level of continued scarcity. 

In the book, they talk about a really simple experiment they did with cookies, where they would have this jar of cookies and then 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, they judged those cookies as tasting better, as to being a higher quality, that they would pay more money for these cookies. 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.

Stig Brodersen  50:55  

Another really great point that Cialdini is making is that when it comes to scarcity, it actually is all about possession, or at least a lot of it is about possession. I mean, that’s really the thing that we’re 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. This is something that’s really profound, especially when we have competition with other people. 

Preston Pysh  51:28  

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. 

You can see why Charlie Munger loves this book. Charlie Munger is really big on psychology so he likes this book, because it helped him identify and understand when I am being tricked? 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 a good reason behind my reaction for feeling the way that I feel. 

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. I got to say this is our first question from a female in our audience. It’s about time that we got a question from a female in our audience. 

If you’re listening to the show, and you want to record a question, go to asktheinvestors.com. You can record your question there. If we play it on the show, you’ll get a free signed copy of the Warren Buffett Accounting Book.

Sender  52:34  

Hey, Stig and Preston. First off, I just want to say thank you guys for all that you do, the information you provide us is so valuable. I will tell everybody about it. I love it. Just thank you, and I look forward to everything you guys do. 

My question is, I recently went to a financial success class hosted by a community education organization in my city. They touched on investing. The teacher mentioned the book, The Millionaire Teacher, and that the book was the core of her investing philosophy that she taught. 

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 and bonds, and split the rest down the middle in US stocks and international stocks.

However, what I’m selling to me was their approach in regard 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? What and selling your winners is the wrong approach when you want to keep your winners so they grow and just sell the losers to get your portfolio percentage balanced?

Preston Pysh  53:55  

Nicole, fantastic question. I just love the fact that you brought this up. 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, 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.

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. If people were 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 and 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.

Stig Brodersen  55:01  

One thing I wanted to address, Nicole, it’s the whole principle about rebalancing your portfolio. I think that as soon as you can come out, and you talk about that you need to have, say, 30% in bonds or 40% bonds, or stocks for that matter, I think that you’re probably heading for trouble. 

I don’t think there’s anything wrong with thinking about how old you are. If you need dividends to stay in the way of living or anything like that, it’s not like that. But having a strict rule about having 40% in stocks or 80% in stock, so 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. 

Even if you don’t have the opportunity to, or knowledge to follow the market, I definitely think you should take another approach than just simply sticking to a rule about saying 30% in stocks or bonds. I think that you’re heading for trouble. 

You should definitely adapt another strategy than that. Then you said this thing about, should I sell my winners? And you’re completely right about that, Nicole. I mean, that really didn’t make any sense to me. Because 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 this represents a good company. If you don’t want to, like make a thorough analysis of all your stocks, you should rather sell your losers and then buy more of the winners. 

Another thing is that, as you probably know, you have to pay capital gains tax every time you sell one of your winners. You’re sticking to bad stocks, and then you have to pay more in tax. It is a really bad strategy. I am really excited that you could see through that already. That’s something that’s really impressing me.

Preston Pysh  56:53  

Yeah, I totally agree with Stig. You’re exactly right. I always related back to the business on Main Street. 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. 

When you own stock, you own a proportional piece of a real business. 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, 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?

Stig Brodersen  57:29  

No. Read it, guys.

Preston Pysh  57:31  

Yeah, definitely read this one. I want to throw out that our good friend Calin 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. If you’re looking for somebody that’s honest, somebody that you can trust, somebody who has an enormous amount of knowledge in this area, you’re going to want to check out Calin’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. Come and sign up on our list. You’ll get these things for free. We only email people twice a month. We don’t send any more emails than 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. 

Outro  1:00:15  

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