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An Interview with Dan Ariely

An excerpt from an Interview with Dan Ariely (Author of Predictably Irrational and The Upside of Irrationality):

Explain the pitfalls of “anchoring” on a particular data point or experience, to the exclusion of other inputs that might lead to better decisions.

The market encourages all kinds of anchoring. The price at which you bought a stock is very vivid in your mind, but in reality you’d be much better off if immediately after the purchase you forgot the price you paid. We also ascribe importance to 52-week highs and lows, but why that? It would make as much sense to look at the highs and lows over 70 weeks, or 40 weeks.

One danger of anchoring is that it can cause regret, which usually isn’t very useful in decision-making. There was an excellent study that looked at people who forgot to mail in their frequent-flyer-program applications, who were far less likely to go ahead and join after getting back from a long trip. They missed getting credit for this big flight and thought if they joined now it would make them regret it. That’s analogous to not buying a stock at $30 because you originally looked into it at $20 and didn’t buy. Buying at $30 will make you regret even more that you missed it at $20, so you won’t buy it. That’s dumb if you really think it’s worth $50.

With investing, focusing on what’s already happened is generally a bad strategy. The decision at any point should be only about looking forward. Just adjusting how you set up your spreadsheets and what you track on reports could help in this regard.

One chapter in the book is titled, “The High Price of Ownership.” Describe what you mean by that.

The basic idea is that ownership changes our perspective, which applies to both material things as well as points of view. One principle involved is that the more work you put into something, the more ownership you begin to feel for it. For example, I can say from personal experience that pride of ownership is inversely proportional to the ease with which I’ve been able to assemble furniture. We have a term for that: the “Ikea effect.”

Once we take ownership of an idea – whether it’s related to politics or sports or investing – a lot of changes take place. We probably fall in love with the idea more than we should. We value it for more than it’s worth. And quite often, we have trouble letting go of it because we can’t stand the idea of its loss. What are you left with then? A rigid and unyielding ideology that can be quite detrimental to clear thought.

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