Psychological Bias: Mere Association
Imagine for a moment you are a child attacked by a dog, or an adult who just got engaged at a certain restaurant. Powerful emotions would be taking hold in both situations, and associations would begin to form. In the case of the child, they may forever associate dogs with fear. In the case of the adult, they may forever associate that restaurant with joy. That process of association can have powerful consequences on a persons judgement.
Let’s see if we can better understand how association comes to affect our lives.
To understand association, we first need to understand memory. If we ignore the complexities of neuroscience, we can conceptualize memory as a simple sequence of associations. For example, a person’s face may be associated with a name. When the stimuli of that face is presented to us, our memory can call up the associated name. Associations that are specific to particular context, like the case of the attacking dog, are further classified as episodic memory. Our episodic memory is used for more personal memories, such as the sensations, emotions, and personal associations of a particular place or time. Where we get into trouble is that we extrapolate these context dependent memories onto situations that seem similar, even if they are not.
Pavlov, in his famous experiment, originally paired the sound of a bell with food. He found that an association between the bell and food could be learned by a subject. Pair by association is the action of associating a stimulus with an idea or object to elicit a response. Advertising agencies use this concept to pair beautiful women with their products, aiming to transfer that arousal to the product.
Much in the same way, it has been shown that drug response can be conditioned. For example, the smell of caffeine might be enough to elicit the response of increased alertness. A placebo can be associated with healing and cause real physical reactions in a subject. Association has the power to alter a person’s reality!
The most powerful form of this type of conditioning is emotional response conditioning. This includes responses such as phobia, disgust, nausea, anger, and sexual arousal. Conditioned nausea, for example, can cause us nausea just from the sight or smell of a food we had problems with in the past. In the same way, seeing a dog, after being attacked by one, is enough to elicit fear.
All of these associations fundamentally alter our judgement. The halo effect is a cognitive bias whereby we assume that because people or businesses are good at doing one thing they will be good at doing another thing. This was first discovered in a study of how commanding officers rated their soldiers. It was always good or bad across the board, never a mixing of traits. This bias takes a specific association and applies it broadly. For example, a celebrity spokesperson uses the halo effect to transfer the positive view of a celebrity onto a product. The popularity of the iPod created a halo effect that transferred to all of Apple’s other products and services. Basically if we see a something in good light, it is hard to subsequently darken that light and vice versa.
Shooting the messenger
Why do we blame the bearer of bad news? As irrational as it may seem, we often associate the person that delivers the news with the bad news itself. This can incentivize people to avoid giving bad news and cause further damage down the line. Warren buffet has stated that one of the few instructions he gives new managers is to report bad news quickly since the good news takes care of itself.
All of what we have talked about so far is part of the field of study called behaviorism. Behaviorism is a systemic approach to the understanding of human and animal behavior. It assumes that all behavior is the consequence of an individual’s history and that reinforcement and punishment play the largest role in that history. This assumption is clearly an oversimplification of human action, but it is still a powerful framework for understanding motivations.
In relation to investing
What does all of this have to do with bettering our investment judgement? Fundamentally, we need to understand that things that happen are always context dependent. Just because a company is growing and profitable doesn’t mean it is brilliant. Just because a company falters, doesn’t mean it is misguided. Just because we were burned on investment XYZ doesn’t mean investment ZYX will burn us. Just because a dog attacked us in the past, doesn’t mean that a dog will attack us in the future. Situations are neither good nor bad just because we associate them with something that is.
The main takeaway from all of this is that we should evaluate people and situations by their own merits, rather than by our associations of them. If we don’t, we may turn out like the child who is afraid of all dogs. And dogs are awesome.