Investment Strategy | The Best Way to Make Money by Exploiting Human Weaknesses

This article is a compilation from a minority investment.

We often think that our choices are entirely our own, but this is actually an illusion.

Let's look at a few scenarios:

Carving a fly in the urinal in the men's restroom can reduce the phenomenon of men urinating outside the urinal by 80%; placing healthy food in a prominent position in a restaurant will lead people to choose healthier options; printing close-up pictures of lung cancer patients' lungs on cigarette packs can reduce smoking rates...

People are easily influenced by various external factors when making choices. Just like the scenarios mentioned above, no one is forcing you or depriving you of your freedom to choose, but it subtly influences your decision. This is the power of behavioral economics.

Humans have many irrational behaviors by nature, which is a weakness of human nature.

Behavioral economics is a discipline that combines psychology and economics to study human irrational economic behavior. In simple terms, behavioral economics can help us understand the weaknesses of human nature and find business opportunities to make money. The 2017 Nobel Prize in Economics was awarded to Richard Thaler for his research on people's irrational consumption behavior.

Eric Johnson, a professor at Columbia Business School, has conducted research and published papers with Richard Thaler. In his new book "Decisions: The 8 Elements of Making the Right Choice," he tells several interesting stories that allow us to see how to understand and seize the weaknesses of human nature, and how to find money-making opportunities from these weaknesses.

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75% Lean Meat and 25% Fat

The psychology laboratory at the University of Iowa conducted an interesting experiment. The staff prepared two samples of beef patties and arranged two groups of students to observe and taste the beef patties separately. The first group of students saw a label that said "25% fat" on the beef patty, while the second group saw a label that said "75% lean meat" on the beef patty.

The staff cooked the beef patties in front of the students and let them taste them. Afterwards, the students were asked to evaluate the beef patties. The results were unexpected. The students who ate the beef patties labeled "25% fat" gave lower ratings in terms of quality, leanness, and greasiness.

The label "75% lean meat" may make students think of juicy and tender beef patties with a rich meaty flavor. They may imagine a beef burger with fresh lettuce leaves and tomato slices, and perhaps a side of salad.

On the other hand, the label "25% fat" is more likely to make students pay attention to the word "fat" and generate negative associations, such as greasiness, sour odor, the high calorie content of cheese, limp fries being heated in the oven, and cows waiting to be slaughtered in feedlots. In short, the two groups of students would think of two different types of beef patties and different aspects of the beef patties, depending on which label they saw.

Psychologists refer to the ease with which people think of something as "accessibility." It can be seen that the labels enhance or weaken the accessibility of concepts related to beef patties, thereby changing the students' preference for one option over the other.

Sometimes, we think we know what we want, but in reality, we often face choices that we have not experienced before. In such situations, we try to recall similar choices we have made in the past and form feelings about the options we are currently facing. I refer to these memories and the feelings they evoke as "combination preferences". You might think that people know what they want when faced with choices, and that once they determine which option aligns with their desires, they can make a decision. However, the real challenge lies in determining what one truly wants. To do so, we recall past experiences and activate memories relevant to the current decision.

Most of the time, the content we associate with is not under our control; it forms automatically as a response. Preferences are not stable and unchanging; they are constructed based on a large number of related memories. Therefore, memories with higher accessibility are more easily activated.

Therefore, deliberately designing to enhance the accessibility of memories in consumer scenarios can help drive consumer behavior.

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The Story of the Cup

In behavioral economics, there is another famous experiment.

A group of participants is arranged, and half of them are randomly given a cup, with it being explicitly stated that the selection of individuals is completely random. Afterwards, those without a cup are asked how much they would be willing to pay to buy one, and those with a cup are asked how much they would be willing to sell one for. In theory, the average valuation of the cup should be the same for both groups.

However, the results often turn out to be unexpected. The average valuation of the cup by those who have it is twice that of those who don't. The average valuation given by those who have the cup is $10, while the average valuation given by those who don't have the cup is $5.

This is known as the "endowment effect" in behavioral economics, a concept first proposed by Richard Thaler in 1980. The endowment effect refers to the fact that the owner of an item tends to value it more.

Thaler believes that due to the existence of the endowment effect, people's consideration of "losses" in the decision-making process is not balanced; the consideration of "avoiding harm" is far greater than the consideration of "seeking gains". In simple terms, the pain of losing $100 is much greater than the joy of finding $100.

One of the reasons for this result is people's "loss aversion" psychology. When selling commonly used items, the brain activates regions associated with loss aversion and pain. Selling commonly used items is often seen as a loss, and the perceived harm from the loss is much greater than the pleasure from an equivalent gain.

This psychology is particularly suitable for explaining the investment psychology in the stock market. The attitude of small and medium-sized investors, retail investors towards stocks depends on whether they have purchased the stock. Once they have purchased a stock, they selectively look for reasons for its rise and ignore reasons for its decline. In this mindset, even if the stock has risen to a high level, they are unwilling to sell; and if the stock falls, they are even more reluctant to cut losses.

Let's take a look at another case where the endowment effect influences personal financial decisions. Suppose you have two job opportunities, with all other conditions being basically the same, and the only difference is that Job A pays an extra $1000 per month but has two fewer days of vacation. Job B is the opposite, with a $1000 lower salary per month but two more days of vacation. If you receive a job offer from Job A first and are already prepared to accept it, it would be difficult to change your decision when Job B calls and wants you to reconsider. Because for you, the extra salary of 1000 yuan for Job A is something you already have. Your utility evaluation of it will have an additional bonus. Conversely, if you accept Job B first, you will also reject the notification for Job A.

This kind of decision does not conform to the rational economic person's routine, but it reflects the endowment effect. It inspires us that when facing situations that require influencing others' decisions, taking the initiative and creating psychological expectations for others with our own transaction conditions can sometimes bring significant advantages.

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A shopping cart filled unintentionally

When you walk into a supermarket, you originally only wanted to buy a few essential items, but the shopping cart gets filled unintentionally, and you can't even remember why many products were put into the cart.

The shelves on both sides of every aisle in the supermarket are actually filled with design.

The supermarket shelves are an important decision environment for people. If manufacturers want their products to be placed in specific positions on the shelves, they need to pay a certain fee to the supermarket. This fee is called "slotting fee." For example, manufacturers like Nestle may have to pay a certain slotting fee to supermarkets like Kroger to place a certain quantity of their own company's products on shelves at specific heights and positions in the supermarket. Even if slotting fees are not directly charged, many supermarkets will deduct this fee when negotiating product prices with manufacturers.

Although sometimes we plan in advance which products to buy, when we don't have a clear plan in advance, the products placed on the shelves at our eye level can indeed influence our choices.

Products placed on shelves at the same height as the consumer's line of sight and with a larger quantity on the shelves are more likely to be the products consumers consider purchasing first. This is because consumers' combination preferences are influenced, and consumers who are unwilling to spend too much time selecting products often directly choose these products. We may think that consumers can control their attention when shopping in a supermarket, but the reality is not entirely so. The packaging of products, the quantity of products placed on shelves, and whether the products are placed on end caps all affect consumers' attention.

In summary, our existing understanding can be summarized in one sentence: the allocation of shelf space is aimed at attracting consumers' attention and making them notice specific products first.

Cognitive psychologists use the term "attentional focus" to summarize the situation where thinking can consciously focus only on a narrow area actively participating in a wide range of stimuli.

Most supermarkets have learned to ensure that the "best fruit and vegetable combinations" of fresh fruits and colorful vegetables attract your attention before you enter the store, using the unconscious focus of your brain to attract you, so that you will put good food into your shopping cart.

If you want to influence behavior, you need to do similar things: before you have the opportunity to persuade or encourage others, first attract their attention or involve them in a simple way.

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Copenhagen Airport immigration channel

If you have been to Copenhagen Airport, you will find yourself facing a similar route choice. After picking up your luggage from the baggage claim, if you have items that need to pay customs duties, you can go left, pass through the customs declaration counter, and exit from the exit; And if there are no items that require customs duties, you can go to the right and leave directly from the exit.

Nearly 90% of passengers choose to walk out through the door on the right because they have no items to declare for customs duties and want to avoid the customs counter on the left. This leads to long queues on the right, delaying everyone's time. The door on the left is actually open to everyone, but those who choose to go to the right rarely go to the left again. They often just wait in frustration in the queue in front of the door on the right.

So, how can we make people consider different reasonable paths? A consulting company specializing in behavioral science research has come up with a solution.

They used dark green channel markings and added signs to inform passengers that both sides are passable. As a result, the number of passengers leaving through the door on the left increased by 54%. And when they changed the color of the channel markings and signs to a brighter fluorescent green, the number of passengers leaving through the door on the left increased by 128% compared to before the transformation.

After the transformation, the bright fluorescent green markings made people realize that there was another equally attractive and reasonable path to choose.

The term "reasonable path" comes from our decision-making in real life. Imagine that we are friends chatting in a park. As we chat, we decide to go outside the park to buy ice cream. We have many routes to choose from. We can walk to the street first and then take a long road, or we can take a shortcut near the carousel area, or we can even directly cut through the carousel area to take a shortcut. However, if there is a beautiful pebble path in the park, we may choose to walk along it; even if climbing over a 0.3-meter-high hedge on the roadside can shorten the distance, we won't do it. These are decisions we can make in an instant. We don't think too much when making these decisions, but they affect the route we will take next. In fact, if someone asks us why we chose this path, we may find it difficult to explain.

The reasonable path determines what information the chooser will focus on and what information will be ignored. The presentation of information can influence the chooser's choice of the reasonable path.

Some seemingly insignificant design elements can have an impact on walking routes and the choice of reasonable paths. The choice of a reasonable path can be considered "once and for all". Once chosen, it is unlikely to be reevaluated (unless there are unexpected major difficulties). Once chosen, the reasonable path is often not changed.

The world we live in is very complex: there are hundreds of cereals on supermarket shelves, thousands of people on dating websites who meet our screening criteria, and hundreds or even thousands of courses available in universities. Faced with these complex decisions, we need to determine which information to focus on and how to simplify the decision-making process, as these decisions will have a greater impact on our final choices.

There are many ways to make a certain reasonable path appear easier to follow. Here, we need to borrow a psychological term called "fluency". Fluency refers to our initial perception and subjective cognition of the difficulty of adopting a certain reasonable path. It is similar to our experience of language fluency. For example, if a book uses many different fonts or even mixes different languages, it will affect the fluency of your reading. "Subjectivity" is the key word for fluency. People don't use a stopwatch to calculate how long it takes to execute a reasonable path, but rely on subjective feelings to judge the difficulty of executing that path. In a business scenario, by slightly reducing the difficulty for consumers to obtain specific information, we can guide them to choose the reasonable path we want them to choose.

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How to choose ice cream

If you go to a trendy handmade ice cream shop, you will see a long menu on the wall displaying various flavors of ice cream. Let's assume that the menu only lists 12 flavors of handmade ice cream, and each flavor has a detailed introduction of ingredients and other information, just like a short article.

The first flavor on the list is strawberry ice cream. The introduction says that this ice cream uses fresh strawberries, and the maker carefully selects various ingredients. The second flavor is chocolate mousse ice cream, and the introduction says it uses high-quality chocolate and delicious liqueur. The third flavor is crispy toffee ice cream...

As mentioned earlier, the effect of combination preference is obvious. When you see the first strawberry ice cream, you will think of its wonderful taste and imagine the taste of ice cream made with it, maybe even salivating. But when you see the introduction of chocolate mousse ice cream, you almost won't have any associations anymore.

But what if the first flavor is chocolate mousse ice cream? You might think of the silky texture of mousse, the sweet taste of chocolate, and the wonderful collision with liqueur.

People often don't invest enough time and effort to find the best option, and different option rankings can change the way people query memory and have combination preferences. People often start reading from the first item on the list and stop before reaching the last item. This is the influence of the "primacy effect."

When considering other options, we compare those options with the current first choice, and a very interesting phenomenon occurs: we tend to distort the information in front of us and only see the advantages of the current first choice. We focus on the advantages of the current first choice and find it difficult to remember the relevant information of other options. When choosing ice cream, our evaluation of different flavors depends on their order of appearance on the menu.

Of course, the option ranked first is not always the most advantageous in all cases. The examples mentioned earlier, where the first option is most advantageous, have two common characteristics. First, the lists where these options appear are mainly composed of text; second, the choosers can independently decide which part of the list to focus on.

These are a few small examples and application methods in the field of behavioral economics. The cases discussed in this book are understandable to ordinary people, and the conclusions are vivid and interesting, as well as the insights and understanding of human nature that cannot be found in traditional economics books. Of course, you can also find ways to make money from them.