Tag: Sam Walton

Reciprocation Bias

“There are slavish souls who carry their appreciation for favors done
them so far that they strangle themselves with the rope of gratitude.”

—Friedrich Nietzsche


If you are like me, whenever receiving a favor, you too feel an immense need, almost an obligation, to pay it back in kind.

If a friend invites you over for dinner, you are almost sure to invite them over to your place for dinner as well. It almost seems as if we were meant to do each other favors and, more important, return them.

Have you ever wondered why?

A large part of the reason is that this behavior seems to have strong evolutionary benefits. It’s so pervasive in human culture, it’s believed that there is no society that does not feel reciprocation’s pull. The archaeologist Richard Leakey believes reciprocation is the foundation on which we have evolved: “We are human because our ancestors learned to share their food and their skills in an honored network of obligation.”

The web of indebtedness created by reciprocation allows for the division of tasks, eases the exchange of goods and services, and helps create interdependencies that bind us into units that are more productive than each of us is on our own. Reciprocation allows one person to give something to another with the expectation that the favor will be returned and the giver will not be taken advantage of.

Throughout human history, reciprocation lowered the cost of transactions, as almost everything begins with one person trusting another. Land could be farmed with one person lending seeds to another. Gifts could be given. Currency could be lent. Aid could be given to the weak. Moreover, reciprocation is not a human concept — it exists in the physical world. Newton's third law is that for every action there is an equal and opposite reaction. You might push on a wall, but the wall pushes back on you.

There is such an advantage to be gained from reciprocation that it’s become imprinted onto our subconscious. For example, we teach our kids to invite others they may not like to their birthday parties because our kids were invited to those kids’ parties. Deeper still, we negatively label people who violate the rule: untrustworthy, moocher, welsher. Because social sanctions can be tough on those who fail to cooperate, the rule of reciprocity often evokes guilt.

As with most things, however, reciprocation has a darker side. Just as we tend to reciprocate good behavior, sometimes we also pay back bad deeds. One of the most effective game-theory strategies is tit for tat.

“Pay every debt, as if God wrote the bill.”

— Ralph Waldo Emerson


The reciprocation of bad behavior is best evidenced in wars. Brutality escalates as each side feels obliged to return the violence it experienced from its counterpart. This spiral can lead to more mindlessly destructive behavior, including torture and mass deaths. There are plenty of examples of this negative reciprocation; consider World War II, the Crusades, and the Mongolian invasions led by Genghis Khan.

It might seem that we humans have exclusively caused much suffering in the world in a relatively short period of time. However, the reciprocation rule is overarching — the human species is not the only one capable of extreme cruelty. Charlie Munger believes that reciprocal aggression appears to be more of a rule rather than an exception among other species, too:

One interesting mental exercise is to compare Genghis Khan, who exercised extreme, lethal hostility toward other men, with ants that display extreme, lethal hostility toward members of their own species that are not part of their breeding colony. Genghis looks sweetly lovable when compared to the ants. The ants are more disposed to fight and fight with more extreme cruelty.

If the reciprocation rule is so overpowering, the natural question here would be, is there a way we can still control our response to it?

Munger advises us to train our patience.

The standard antidote to one’s overactive hostility is to train oneself to defer reaction. As my smart friend Tom Murphy so frequently says, “You can always tell the man off tomorrow if it is such a good idea.”

There’s also another way. Because the reciprocation tendency is so extreme, we can reverse the course of events by doing good rather than harm to the other party.

Particularly in WWI, the fighting sometimes paused after a positive feedback loop of less severe damage occurred. Here is how a British staff officer described his surprise about the degree of trust between the British and German soldiers:

[I was] astonished to observe German soldiers walking about within rifle range behind their own line. Our men appeared to take no notice. I privately made up my mind to do away with that sort of thing when we took over; such things should not be allowed. These people evidently did not know there was a war on. Both sides apparently believed in the policy of “live and let live.” (Dugdale 1932, p. 94)

Such behavior was not restricted to this one case, but was rather common in trench warfare during the later stages of the war.

And this makes me think that if such things could happen even during a war, there is little doubt that we could improve our relationships by doing a little undeserved good for the other person.


Reciprocation is just as important in breeding love as it is in breeding hate.

Andy Warhol said, in The Philosophy of Andy Warhol (From A to B and Back Again):

Love affairs get too involved, and they’re not really worth it. But if, for some reason, you feel that they are, you should put in exactly as much time and energy as the other person. In other words, “I’ll pay you if you pay me.”

This is the reciprocation tendency at its finest. Truth is, love and marriage would lose much of their allure if there were no reciprocation tendency among partners. By loving, we literally may become loved.

As lovers and spouses, we promise loyalty to our partners and we expect it to be returned. We are encouraged to practice the virtues of marriage in front of not only our partners, but also society. These effects reinforcing each other can be thought of as the fabric of many of today’s relationships.

Furthermore, reciprocation not only holds us together, but can also bring us together in the first place. Displaying generosity can be a powerful way to advance a relationship by setting up implicit expectations of compliance from the other person.

Women, in particular, often report on the pressure they feel after receiving expensive gifts or dinners. In Influence, professor of psychology Robert Cialdini quotes the words of one of his (female) students:

After learning the hard way, I no longer let a guy I meet in a club buy me a drink because I don't want either of us to feel that I am obligated sexually.

Perhaps the key to genuine relationships lies at least partially in each party being kind without expectations. Indeed, in communal relationships like marriage, friendship, and the parent-child relationship, the accounting is unnecessary, and if you think about it, you’ll see that it is hardly ever practiced.

What is exchanged reciprocally instead is the near-unconditional willingness to provide what the other side needs, when it is needed. Still, some symmetry seems to be best; even in close friendships, strong inequalities will eventually make themselves noticed.

Abusing Reciprocity

As with any human tendency, reciprocity holds a great potential for abuse. Charlie Munger recalls how the eccentric hedge-fund manager Victor Niederhoffer managed to get good grades with an impressive course load when he was an undergraduate student at Harvard.

Contrary to what one may expect, Niederhoffer was not a very hard-working student. Instead of studying, he liked spending his time playing world-class checkers, gambling in high-stakes card games, and playing amateur-level tennis and professional-level squash. So how did he manage to get those good grades?

Munger explains:

He thought he was up to outsmarting the Harvard Economics Department. And he was. He noticed that the graduate students did most of the boring work that would otherwise go to the professors, and he noticed that because it was so hard to get to be a graduate student at Harvard, they were all very brilliant and organized and hard working, as well as much needed by grateful professors.

And therefore, by custom, and as would be predicted from the psychological force called reciprocity tendency, in a really advanced graduate course, the professors always gave an A. So Victor Niederhoffer signed up for nothing but the most advanced graduate courses in the Harvard Economics Department, and of course, he got A, after A, after A, after A, and was hardly ever near a class. And for a while, some people at Harvard may have thought it had a new prodigy on its hands. That’s a ridiculous story, but the scheme will work still. And Niederhoffer is famous: they call his style “Niederhoffering the curriculum.”

There are cases that are less innocent than Niederhoffer’s gaming the system. For example, when a salesman offers us a cup of coffee with cookies, we are likely to be subconsciously tricked into compliance by even such a minor favor, which combines reciprocity and association. Buying can be just as much about the actual experience as it is about acquiring goods at an optimal price, and salesmen know this.

Your Costs Are My Benefits

In our personal expenses, we are the ones suffering from our follies, but an important problem arises when we buy on someone else’s behalf. Imagine that you are the purchasing agent for an employer. Now the extra costs that are paid in return for the minor favor you receive are incurred not by you but by your employer.

Gifts and favors tend to create perverse incentives on the purchaser’s part and allow the seller to maximize his advantage. Smart employers know this and therefore do not allow their purchasing personnel to accept gifts. Sam Walton is one notable example; he wouldn't let Walmart’s purchasing agents accept even a hot dog from a vendor.

The exchange of favors at another’s expense is not restricted to purchasing on someone’s behalf.

Munger notes that the reciprocation tendency can also be held responsible for some wicked pay dynamics in the boardroom of public companies:

It’s incredible the reciprocity that happens when CEOs keep recommending that directors get paid more, and then the directors raise the CEO’s pay — it’s a big game of pitty pat. And then they hire compensation consultants to make sure no-one else is getting paid more. This is true even if the CEO is a klutz and a little dishonorable. I think the existing system is very bad and my system would work better, but it’s not going to happen.

In order to prevent these dynamics, he suggests that the board of directors does not get paid at all.

I think tons of eminent people would serve on boards of companies like Exxon without being paid. The lower courts in England are run by unpaid magistrates. And Harvard is run by boards of people who don’t get paid — in fact, they have to pay [in the form of donations to the school]. I think boards would be better if they were run like Berkshire Hathaway’s.

For these same reasons, Munger believes that the reciprocity tendency should be part of the compulsory law curriculum; otherwise, students may unknowingly steer away from representing their clients’ best interests. Ignorance of the reciprocation rule may explain why malpractice still occurs even among lawyers with the best intentions. The law schools simply don’t know, or care to teach, what Sam Walton knew so well.

The Concession

Besides the obvious doing of favors, there is a more subtle technique that may lure us into reciprocal and cooperative behavior. Rob Cialdini recalls an incident that made him aware of the technique:

I was walking down the street when I was approached by an 11- or 12-year-old boy. He introduced himself and said he was selling tickets to the annual Boy Scouts Circus to be held on the upcoming Saturday night. He asked if I wished to buy any tickets at $5 apiece. Since one of the last places I wanted to spend Saturday evening was with the Boy Scouts, I declined. “Well,” he said, “if you don't want to buy any tickets, how about buying some of our chocolate bars? They're only $1 each.”

Cialdini automatically bought two chocolates and immediately realized that something was wrong:

I knew that to be the case because (a) I do not like chocolate bars; (b) I do like dollars; (c) I was standing there with two of his chocolate bars; and (d) he was walking away with two of my dollars.

After meeting with his research assistants and conducting experiments with a similar setup on his students, Cialdini arrived at a rule that explains this behavior: The person who acts in a certain way toward us is entitled to a similar return action.

The person who acts in a certain way toward us is entitled to a similar return action.

This rule has two consequences:

  1. We feel obliged to repay favors we have received.
  2. We feel obliged to make a concession to someone who has made a concession to us.

As Cialdini and his research group reflected, they increasingly saw that the Boy Scout had brought him under the rule. The request to purchase the chocolates was introduced as a concession — a retreat from the request that Cialdini buy some $5 tickets.

If Cialdini was to live up to the dictates of the reciprocation rule, there had to be a concession on his part. And there was — after all, Cialdini moved from rejection to compliance after the boy had moved from a larger to a smaller request. The remarkable thing, and this is where bias comes in, was that Cialdini was not at all interested in either of the things the boy had offered.

Why would this rule be so important? Because it can lead to a lot of unnecessary trouble.

Both Cialdini and Munger believe that a subconscious reciprocation tendency was an important lever that allowed Watergate, one of the biggest political scandals in history, to occur.

Breaking into the Watergate offices of the Democratic party was a plan that was conceived by G. Gordon Liddy, an aggressive subordinate with a questionable reputation. Liddy pulled the same trick on his superiors that the twelve-year-old boy did on Cialdini. The $250,000 break-in plan was not the first that Liddy proposed — it was a significant concession from the previous two. The first of these plans, for $1 million, entailed a program that included a specially equipped “chase plane,” break-ins, kidnapping and mugging squads, and a yacht featuring “high-class call girls,” all meant to blackmail the Democratic politicians.

The second plan was a little more modest, at half of the initial price and reductions in the program. After the two initial plans were rejected by his superiors, Liddy submitted the third, “bare bones” plan, which was a little less stupid and cost “a mere” quarter of the initial price.

Do you see what Liddy did there?

Unsurprisingly, his superiors gave in; eventually, the plan was approved and it started the snowball that caused Nixon to resign. As the Watergate example illustrates, an unwatched reciprocation tendency may subtly cause mindless behavior with many extreme or dangerous consequences.


One of the reasons reciprocation can be used so effectively as a device for gaining another's compliance is that it combines power and subtlety. Especially in its concessionary form, the reciprocation rule often produces a yes response to a request that otherwise would surely have been refused.

I hope that the next time you come across a situation where you feel the need to return a favor, you will think twice about the possible consequences of accepting it in the first place. You may think, for example, that someone offering you a free pen will not influence you at all, but there is an entire human history arguing otherwise. Perhaps Sam Walton’s policy, of not accepting favors at all in matters where impartiality is preferred, is best.

Yet there is some truth to saying that reciprocal behavior also represents the best part of human nature. There are times when successful trade, good friendships, and even romantic relationships develop out of the need to feel symmetrical in our relationships. Indeed, it could well be that the very best parts of our lives lie in relationships of affection in which both we and the other party want to please each other.

The “Ink Spot” Strategy That Propels Wal-Mart And Counterinsurgency

I thought this was interesting. Here is Sam Walton, in his own words, detailing the Wal-Mart Strategy from the earliest days. What was novel at the time is now a somewhat common way for businesses to expand. It's also used in the military as part of an “ink spot” strategy.

But before we get to that, here is Sam Walton writing in Made in America:

Now that we were out of debt, we could really do something with our key strategy, which was simply to put good-sized discount stores into little one-horse towns which everybody else was ignoring. In those days, Kmart wasn’t going to towns below 50,000, and even Gibson’s wouldn’t go to towns much smaller than 10,000 or 12,000. We knew our formula was working even in towns smaller than 5,000 people, and there were plenty of those towns out there for us to expand into. When people want to simplify the Wal-Mart story, that’s usually how they sum up the secret of our success: “Oh, they went into small towns when nobody else would.” And a long time ago, when we were first being noticed, a lot of folks in the industry wrote us off as a bunch of country hicks who had stumbled onto this idea by a big accident.

Maybe it was an accident, but that strategy wouldn’t have worked at all if we hadn’t come up with a method for implementing it. That method was to saturate a market area by spreading out, then filling in. In the early growth years of discounting, a lot of national companies with distribution systems already in place— Kmart, for example— were growing by sticking stores all over the country. Obviously, we couldn’t support anything like that.

But while the big guys were leapfrogging from large city to large city, they became so spread out and so involved in real estate and zoning laws and city politics that they left huge pockets of business out there for us. Our growth strategy was born out of necessity, but at least we recognized it as a strategy pretty early on. We figured we had to build our stores so that our distribution centers, or warehouses, could take care of them, but also so those stores could be controlled. We wanted them within reach of our district managers, and of ourselves here in Bentonville, so we could get out there and look after them. Each store had to be within a day’s drive of a distribution center.

We saturated northwest Arkansas. We saturated Oklahoma. We saturated Missouri. We went from Neosho to Joplin, to Monett and Aurora, to Nevada and Belton, to Harrisonville, and then on to Fort Scott and Olathe in Kansas —and so on. Sometimes we would jump over an area, like when we opened store number 23 in Ruston, Louisiana, and we didn’t have a thing in south Arkansas, which is between us and Ruston. So then we started back -filling south Arkansas. In those days we didn’t really plan for the future. We just felt like we could keep rolling these stores out this way, and they would keep working, in Tennessee, or Kansas, or Nebraska— wherever we decided to go. But we did try to think ahead some when it came to the cities. We never planned on actually going into the cities. What we did instead was build our stores in a ring around a city— pretty far out— and wait for the growth to come to us. That strategy worked practically everywhere. We started early with Tulsa, putting stores in Broken Arrow and Sand Springs. Around Kansas City, we built in Warrensburg, Belton, and Grandview on the Missouri side of town and in Bonner Springs and Leavenworth across the river in Kansas. We did the same thing in Dallas.

This saturation strategy had all sorts of benefits beyond control and distribution. From the very beginning, we never believed in spending much money on advertising, and saturation helped us to save a fortune in that department. When you move like we did from town to town in these mostly rural areas, word of mouth gets your message out to customers pretty quickly without much advertising. When we had seventy-five stores in Arkansas, seventy-five in Missouri, eighty in Oklahoma, whatever, people knew who we were, and everybody except the merchants who weren’t discounting looked forward to our coming to their town. By doing it this way, we usually could get by with distributing just one advertising circular a month instead of running a whole lot of newspaper advertising. We’ve never been big advertisers, and, relative to our size today, we still aren’t. Just like today, we became our own competitors. In the Springfield, Missouri, area, for example, we had forty stores within 100 miles. When Kmart finally came in there with three stores, they had a rough time going up against our kind of strength.

So for the most part, we just started repeating what worked, stamping out stores cookie-cutter style. The only decision we had to make was what size format to put in what market. We had five different store sizes—running from about 30,000 to 60,000 square feet— and we would hardly ever pass up any market because it was too small. I had traveled so much myself looking at competitors in the variety store business that I had a good feel for the kind of potential in these communities. Bud and I knew what we wanted in the way of locations. Like so many of the ideas that have made our company work from the beginning, we’re still more or less following this same strategy, although today we’ve moved into some cities outright. But I think our main real estate effort should be directed at getting out in front of expansion and letting the population build out to us.

A lot of companies are now trying to do similar things.

Interestingly, something similar came up in General Stanley McChrystal's memoir My Share of the Task:

The strategy was neither new nor guaranteed to work. It was a version of the “ink spot” approach French General Lyautey made famous in Madagascar and Morocco and one often adopted in counterinsurgency campaigns of the nineteenth and twentieth centuries. The concept called for providing secure zones inside which the population could be protected, governed, and allowed to conduct economic activity free from insurgent pressure. The theory held that as people were free to live their lives, this would enhance the government’s legitimacy and strength. And as these domains of government control expanded— like inkblots seeping on a page— they would conjoin. The United States’ counterinsurgency doctrine, which outlined the steps of “clear, hold, and build,” was a manifestation of this approach. That summer, we added “sustain” as a fourth tenet. Success in counterinsurgency was less dependent upon the brilliance of the strategy— the concept is not that hard to understand— than it was on the execution. Counterinsurgency is easy to prescribe, difficult to perform.