Why we sell the wrong stocks from our portfolio

Why we sell the wrong stocks in our portfolio

For most us, the word ‘stocks’ or ‘shares’ is associated with feelings of it being risky, a gamble, incomprehensible, scary, involving the luck factor and so on. Understandably so, betting on the future value of a stock, is no easy task. Even the experts get it wrong a lot of the times. But I would like to drive your attention to a particular behaviour related to stocks, which shows how we make mistakes when selling stocks from our portfolio.

Consider this situation. You need money for an important event in your life and need to sell some stock. Amongst the stocks you own, say, Mata Power according to you is a winner, because if you sell it today you will have achieved a gain of Rs. 3,00,000. You hold an equal investment in Mata Airways, which you consider a loser, is currently worth Rs. 3,00,000 less than you paid for it. The value of both stocks has been stable in recent weeks. Which are you more likely to sell?

What happens is that our minds see the choice like this: I could close the Mata Power account and score a success for my record as an investor. Alternatively, I could close the Mata Airways account and add a failure to my record. Which would I rather do?

Daniel Kahneman, psychologist and nobel laureate in Economics, says if the problem is framed by us, as a choice between giving yourself pleasure and causing yourself pain, you will certainly sell Mata Power and enjoy your investment prowess. He calls this the disposition effect.

He says, investors set up a mental account for each share that they have bought, and want to close every account as a gain. It is only the very savvy expert, who would take a comprehensive view of the portfolio and sell the stock that is least likely to do well in the future, without considering it a winner or loser.

The disposition effect is a costly bias. If you care about your wealth rather than your immediate emotions, you will sell the loser Mata Airways and hang on to the winning Mata Power. But closing a mental account with a gain is a pleasure, but it is a pleasure we pay for.

Companies fall into a similar trap of continuing to fund a project even though the returns are now less favourable, simply because they have already put considerable amount of money. When faced with a choice of investing money in a new project that is considered likely to bring higher returns, it most often leads to favouring the option of continuing to fund the existing project.

We are all horny

We are all horny

Honking is so embedded in Indian driving etiquette that Audi India has confirmed, in media, having designed extra loud, ultradurable horns for vehicles sold in India. Meanwhile people face a rapidly growing problem with many side effects of noise pollution. Some of them being increased hyper-tension, blood pressure, hearing loss, increased risk of heart attacks and disturbed sleep patterns. Reports in Indian cities show that noise levels are way beyond the permissible limits. Truly we are all horny.

Honking like other behaviour, over time, becomes a habit. And habits are essentially automatic behaviour where one does not consciously think about the action, but rather, the decision-making happens automatically. So we thought that it was important to shift the driver from an automatic mode of honking as a habit, to make him deliberate on whether the situation really demanded that he honk. We needed to make the driver conscious of the habit of honking by giving him immediate feedback while the driver was still driving the car, so that the next time the driver honked only when he thought it was necessary, rather than honk indiscriminately.

This approach led us to create a ‘Horn Reduction System’ we’ve called Bleep that has proved to reduce honking amongst each and every one of participants by an average of 61%.

Bleep – A horn reduction system

Bleep is a device with a simple red button fitted in an easily accessible place on the dashboard of a car. The red button has a frown sketched on it and when the driver presses the horn, the red button begins to beep and flash. In order to switch the device off, the driver needs to press the red button.

The 6-month long experiment

Bleep has been tested on manual and automatic geared cars amongst 30 people including men, women and chauffeurs of private vehicles, over 6 months and over 3800 kms. The participants were given either of two cars – manually geared Swift or automatic Honda City, with Bleep fitted, to be driven for 4 days during the working weekdays. Two days with Bleep off and the next two days with Bleep on, so that we could compare the number of honks per kilometer in the control situation (pre-Bleep) with the experimental situation (post-Bleep). Bleep has been tested as triggering off every time the horn is pressed, which is a stricter version in the manually geared Swift car, as well as triggering off every third time the horn is pressed, which is more lenient, in the automatic Honda City. In the first phase of the experiment the drivers were not given any information about the experiment. In the second phase they were simply shown how the system works.

The results

We have found a reduction in honking in each and every one of the participants wherein honks per km reduced between 19% to 96% (on an average by 62.5%) when Bleep was triggered every time the horn was pressed (stricter version). A reduction in honks per km was found between 16% to 91% (on an average by 60.3%) when Bleep was triggered every third time the horn was pressed (lenient version). These numbers prove that the reduction in honking relates to indiscriminate honking that drivers can do without.

The science of Bleep

The science behind the effectiveness of Bleep is that it assists the driver in reducing honking by using a visual-cum-sound reminder. The driver gets instant feedback when the red light with the frown beeps and flashes when he honks, making the driver conscious about his inappropriate behaviour of honking and making him deliberate about when he really required to honk. The driver having to physically switch off the reminder further helps in persuading him to honk lesser. The frown on the device is designed to indicate that honking is socially inappropriate behaviour. A study called ‘Overcoming Intuition’ done by Alter, Oppenheimer, Epley and Eyre has shown that frowning helps the brain reduce the reliance on intuition and activates analytical reasoning. Another research at the Stanford University School of Medicine has shown that peak brain activity (arresting attention) occurred during a short period of silence between musical movements, which is evidence that sounds that have a pause in between make you more alert. That’s why a seatbelt reminder like sound was used in the beep.

Bleep comes with many other unique features like recording, displaying and transmission of vehicle data like number of honks, speed at time of honk, location, time, etc., inside the vehicle or at a remote location and many other customised features. Patent pending.

Bleep has been featured in Fast Company, BMW Guggenheim LabTimes of India, CNBC OverdriveRadio One 94.3, Top Gear India’s June issue, Mint-WSJMumbai Boss, The Sunday Guardian and DNA till now.

The surprising psychology of waiting in queues

The surprising psychology of waiting in queues

Waiting in queues can elicit powerful emotions in us. Stress. Boredom. The nagging sensation that one’s life is slipping away. And of course we believe that the other line moves faster. While losing to the line at our left, drives us to despair, winning the race against the one to our right, does little to lift our spirits. We almost always fixate on the line we’re losing to and rarely the one we’re beating.

All of this makes for a lasting impression on your customers’ perception about your brand if you’re a hypermarket or a bank or an airline or any business whose business it is to serve people. So how does one tackle it?

Some years ago, executives at a Houston airport faced a troubling customer-relations issue. Passengers were lodging an inordinate number of complaints about the long waits at baggage claim. In response, the executives increased the number of baggage handlers working that shift. The plan worked: the average wait fell to eight minutes, well within industry benchmarks. But the complaints persisted.

Puzzled, the airport executives undertook a more careful, on-site analysis. They found that it took passengers a minute to walk from their arrival gates to baggage claim and seven more minutes to get their bags. Roughly 88 percent of their time, in other words, was spent standing around waiting for their bags.

So the airport decided on a new approach: instead of reducing wait times, it moved the arrival gates away from the main terminal and routed bags to the outermost carousel. Passengers now had to walk six times longer to get their bags. Complaints dropped to near zero!

Occupied time (walking to baggage claim) feels shorter than unoccupied time (standing at the carousel). “Often the psychology of queuing is more important than the statistics of the wait itself,” says, M.I.T. operations researcher Richard Larson, considered to be the world’s foremost expert on lines.

Our expectations further affect how we feel about lines. Beating expectations buoys our mood. All else being equal, people who wait less than they anticipated, leave happier than those who wait longer than expected. This is why Disney, the universally acknowledged master of applied queuing psychology, overestimates wait times for rides, so that its guests (never customers, always guests) are pleasantly surprised when they ascend ‘Space Mountain’ ahead of schedule.

This is a powerful ploy because our memories of a queuing experience, are strongly influenced by the final moments, according to research conducted by Ziv Carmon, a professor of marketing at the business school Insead and the nobel-winning behavioral economist Daniel Kahneman. When a long wait ends on a happy note, we tend to look back on it positively, even if we were miserable much of the time. Conversely, if negative emotions dominate in the final minutes, our retrospective audit of the process will skew toward cynicism, even if the experience as a whole was relatively painless.

But the biggest influence on our perception of queues has got to be ‘fairness’: what you feel when someone jumps the queue. If you haven’t faced a situation like this yet in India, where jumping the queue is a survival skill, you must be a celebrity. Ranbir Kapoor did it when I was first in line for the application of an international driving license. He assumed it was ok for celebrities to break queues. So he simply smiled, said sorry but guess what, it worked!

Illustration by Mayur Tekchandaney

Traffic jams can be eased by gamification

Playing games could ease traffic congestions

Billions of hours, fuel and money gets wasted in traffic congestions. Though there has been some progress in the last few years in Mumbai with the starting of the Bandra-Worli sea-link and the fly-overs being built, there’s a strong feeling that it may not be enough. Take the case of Delhi. Delhi is most privileged to have more than 21 per cent of its geographical area under road space. Delhi has built the maximum roads and flyovers. Yet its roads are totally gridlocked. While the government has targeted to increase the usage of public transport from existing 40% to 80% by 2020, it will extremely difficult to curb the ‘status’ tag of cars.

Singapore has had the ERP (Electronic Road Pricing) system that charges extra dollars for using congested zones during peak hours. So do London and Stockholm. However congestion charging has come under criticism that it favours the rich and that it adversely affects retail businesses in the congested zone. So could gaming come to the rescue?

Two experimental transportation projects are under way in Singapore and Silicon Valley that aim to improve commutes through gaming. In one of the experiments, conducted by Balaji Prabhakar, a Stanford engineering professor, more than 17,500 Singapore commuters have enrolled. Participants in the Singapore program shift their commutes to off-peak hours to earn credits, which can be traded for a chance to win cash.

So rather than only punishing traveling in peak hours, this program also rewards traveling in non-peak hours.

Balaji Prabhakar said during a recent talk at the university’s campus in Palo Alto, California, that 11-12 percent of users in Singapore have shifted off-peak. Men tend to shift later, he said, while women generally shift earlier. He says that 11% might not seem much, but they’re enough to make a difference in traffic flow. He ran a successful project for employees of Infosys called INSTANT (Infosys-Stanford Traffic project) in Bangalore in 2008-2009 and is now running the project at Stanford University as well.

I’m wondering how this could be implemented in Mumbai as public transportation is neither electronically controlled nor linked to each other. However prices of public transport can be controlled manually. So imagine the ticket prices of road transport – bus, rickshaw, taxi and the sea-link like toll is increased by 25% in peak hours (8:30-10am and 6:00-7:30pm), but is also decreased by say, 10% during off-peak hours. Could it work?

Illustration by Mayur Tekchandaney

Words can work like drugs

Words can work like drugs

Words have been known to have the power to affect behaviour change when used appropriately. As Rudyard Kipling said, “Words are, of course, the most powerful drug used by mankind.”

Here’s an interesting case that illustrates this point. Richard Wiseman, an experimental psychologist and author wanted to find out if it was possible to increase donations by creating the perfect charity box. He created four charity boxes. Each identical in shape and size, and all advertised the same charity – National Literacy Trust. He placed each box at one of the four randomly selected tills at the Borders bookstore, UK. Each carried a message that psychologists believed would be effective:

‘Please give generously’

‘Every penny helps’

‘Every pound helps’

‘You can make a difference’

Which one do you think collected the most amount of cash?

‘Every penny helps’ worked best, containing 62% of all contributions. ‘You can make a difference’ was at second place, ‘Please give generously’ at third and ‘Every pound helps’ was last at fourth place.

Why did this happen? According to work done by psychologist Robert Cialdini from Arizona State University, many people are concerned that putting a very small amount of money will make them look mean, so end up giving nothing at all. ‘Every penny helps’ legitimizes, and therefore encourages, the smallest of contributions. In contrast ‘Every pound helps’ had the reverse effect.

Meanwhile I thought I’d end the year with a tweet I read recently – ‘Do not worry about the past & the future. This moment needs your attention, this is where your life exists.’

Wish you Merry Christmas and a rocking 2013.

Illustration by Mayur Tekchandaney

If you’re good at math, consider yourself blessed

if you're good at math, consider yourself blessed

I struggled all my studying years with MATH (Mental Abuse to Humans). I was so bad at math that I had even developed a method of memorizing patterns to solve problems, so that I could apply them in case a similar question came up in the exam paper. If you were and are good at math, I have very high regards for you, because most of the human race is simply bad at it.

Consider these two promotions. One is a flat ‘33% off’ on the MRP. The other is 33% more quantity of the product free. In short – ‘33% extra free’. Are both similar? Which one seems more attractive to you?

If both are similar in terms of a proposition to you, but you still prefer ‘33% extra free’, you’re in the majority. In a study, Akshay Rao, the General Mills Chair in Marketing at the University of Minnesota’s Carlson School of Management, asked undergraduate students to evaluate two deals on loose coffee beans — one with 33% more beans for free, the other at 33% off the price. All the participants chose ‘33% extra free’, inspite of ‘33% off’ being a quantitatively bigger and better offer favouring the customer. (33% off = 50% extra free)

The reason why we opt for ‘33% extra free’ is not just that we suck at math, but we are also infatuated with the idea of getting something for free. It seems as if the power of ‘free’ makes us worse at math.

Now, how you take advantage of this will depend on whether you are a consumer or a marketer.

Illustration by Mayur Tekchandaney

Goddess of magic can save you fuel

Goddess of magic can save you fuelRemember being told by a kid in an ad sometime back, to switch our cars off at signals, because saving fuel meant saving money? If you didn’t, crores of tax payers money (in India), in the form of TV, radio, outdoor advertising went down the drain. Ok, so you are one of the few who do recall this message. Have you changed your behaviour? Do you now switch off your car at traffic signals? Does your driver do it? Have you asked your driver to do it? Ever?

Most of us don’t. It’s too much effort. You would first need to switch the AC off and then turn the ignition switch off, to turn the engine off. And when the signal turns green, you gotta turn the ignition key on, get frantically honked at (we’re talking India remember), change the gear from neutral to first, get frantically honked at again, put the hand brake down, and finally get moving. Oh yes, turn the AC on again. Even if you are highly eco-conscious or highly stingy, it’s still too much effort.

Here comes the Goddess of Magic. Isis, the Greek Goddess of Magic, is the inspiration behind the name of an innovative automobile product called, the same in capital letters – ISIS – Intelligent Stop Immediate Start!

Intelligent Stop Immediate Start (ISIS) is a device, which if fitted inside your car, can save you anywhere between Rs. 500 – Rs. 2,500 for every Rs. 10,000 you spend on fuel. The way it works is that when your car comes to a halt at a traffic signal or while in stop-and-go traffic, and you put the car in neutral, ISIS switches the engine off automatically. To start the engine back, you simply have to press the clutch. No additional effort required. Solutions made keeping in mind that humans are built lazy, work well.

What about the AC you must be wondering. ISIS comes with a built-in sensor, which detects even a minor drop in cabin temperature. If ISIS detects a drop in temperature beyond what is set by the driver, it restarts the engine automatically. As per tests conducted, the cabin temperature remains constant for about 1-2 minutes when the engine is switched off. Most signals restart, within 60 seconds in any case. And if you wish to start the engine/AC at any time, you simply need to press the clutch and the engine with the AC starts again.

One more benefit of the Goddess of Magic, besides saving fuel and money – the reduction in particulate matter, hydrocarbons, nitrogen oxides, carbon monoxide, sulfur dioxide, carbon dioxide – the stuff that’s weakening our lungs.

ISIS has been developed by Indent – Dhruv Chaudhry’s company. Indent is an auto research and development company, which focuses on creating innovative auto products that, benefit the environment and improve safety. To know more about ISIS click here.

Our advice to the PCRA (Petroleum Conservation Research Association) and Mr. S. Jaipal Reddy, (Union Minister of Petroleum & Natural Gas, India) – instead of spending crores on building awareness for saving fuel via advertising, change actual behaviour by promoting products like ISIS and help India save trillions worth of fuel.

Illustration by Mayur Tekchandaney

My ideas are better than yours

My idea is better than yours

Lets be honest, each one of us believes that our ideas are the best. We fall in love with our own ideas so deeply that most of the times we’re open to any solution, as long as it’s ours. Dan Ariely, author of Predictably Irrational and The Upside of Irrationality calls it ‘The Not-Invented-Here bias’.

‘The Not-Invented-Here Bias’ is basically this: ‘If I (or we) didn’t invent it, then it’s not worth much.’

One may argue that it is good to be attached to our ideas as it could motivate us and create a higher level of commitment. But it comes with its side effects. One example is of Thomas Edison, the inventor of the lightbulb. He fell hard for direct current (DC) electricity. At that point in time Nikola Tesla developed alternating current (AC) electricity under the supervision of Edison, but Edison dismissed Tesla’s ideas as ‘splendid, but utterly impractical’.  Despite all of Edison’s efforts to foil it, AC eventually prevailed.

Sony is another example. Sony invented the transistor radio, the Walkman, the Trinitron Tube and many other successful inventions. But after a series of successful ones, Sony engineers began suffering from ‘The Not-Invented-Here Bias’. If something wasn’t invented at Sony, the engineers wanted nothing to do with it. iPod and Xbox were ‘outside’ ideas and therefore not considered as good as Sony’s ideas. We all know the consequences.

Acronyms (OAT, ECT, BCT, etc) that blossom inside companies are another example. Dan Ariely says ‘though they are a shorthand to talk about an idea, they confer a kind of secret insider knowledge. They tend to increase the perceived importance of the idea, and at the same time they keep other ideas from entering the inner circle.’

But like many findings in behavioural economics, this too, can be made useful. One example of its usefulness can be demonstrated in how Pillsbury made its instant cake mixes. When instant mixes were introduced in the US years back, housewives had to simply add water to make the cake. The mixes didn’t go down too well with housewives. So Pillsbury left out the dried eggs and required women to add fresh ones, along with milk and oil, to the mix and the sales took off. For housewives, adding eggs and other ingredients, gave a sense of ownership and pride and made them feel it was made by them. I’m sure each one also felt that their cake was better than the ones made by others.

Illustration by Mayur Tekchandaney

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