Wednesday, April 8, 2015

Reciprocation maybe good manners but bad for investments

“You’re like a one-legged man in an ass-kicking contest.”
Charlie Munger

Reciprocation is a powerful psychological tool. Recently a box showed up to my house address to my sister’s from Dabur. It had several products of Dabur – and in standard packet sizes. The whole thing in a store would probably cost 500 rupees. It forced us to try the products and after six months I found myself asking for several of those products in a grocery store which I never knew about before. It got me thinking why was I asking for those products? The answer lies in reciprocity. Dabur had given us some products for free and now my mind somewhere in the subconscious had registered that I need to reciprocate. The products in question were not bad but not really better in quality than the competition. But they got my attention.

The question is how does this impact investing? Its impact on the investor can be small gifts from a broker make you want to give him some business. Now you may not realize it (and in some cases the broker also may not realize it) but you may end up buying something you shouldn’t have. Several banks and wealth managers send their customers gifts on festivals. In order to avoid this bias you have to return these or not do business with the ones who do because it can cause reciprocation bias.

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