Last month I decided to pay a visit to my friend Dr. Placebo in his clinic. It was a Friday and for some strange reason people are too happy to fall sick on a Friday. So it was a relatively less busy day for my doctor friend. For that matter it should be easy for you to guess the busiest day of the week for him – Monday of course. 🙂
I wasn’t sick as such but I like to catch up with Dr. Placebo once in awhile. In the past he has helped me in thinking about important mental models including Do Something Bias  and Mean Reversion . So I was hoping that a chit chat with him will again nudge me to some fresh insights. I wasn’t wrong.
“So doc! Tell me something ironical about your profession?”, I asked him thinking that a question like that could lead the conversation to an interesting direction.
“The biggest irony of being a physician is that many people don’t really need doctor’s help. Many a times, my prescription is effective because people believe in them. Their belief in my treatment is what cures them. You see your doctor and you feel better.”
He continued, “Sometimes just the fact that a doctor or nurse is paying attention to us and reassuring us not only makes us feel better but also triggers our internal healing processes. In many cases they would benefit just by popping a sugar pill. And it’s a proven fact also known as Placebo Effect.”
“I see. That kind of explains your strange name.”, I winked thinking that he wouldn’t mind a friendly tease.
“Don’t get me started on the origins of my name. But you should read about Pavlovian Conditioning. Now if you please excuse me, I have to leave now. It’s Friday and I have plans.”, saying this he got up from his chair and started leaving.
I think I had offended him by joking about his name. Moreover he had already given me more time than what he usually gives to his fee paying patients. So this free rider had to leave.
But the visit had good payoff for me because it led to me to discover the next topic for Latticework series – Pavlovian Conditioning which is sometimes referred to as classical conditioning.
If you have been following Safal Niveshak for sometime, I can safely bet that you know who Charlie Munger is. For the uninitiated ones, he is the vice chairman of Berkshire Hathaway and Buffett’s best buddy. He’s known for his multidisciplinary thinking and considered to possess the smartest brain. And he is 91 years old.
Based on my readings about Charlie Munger, I can say that one of his favorite mental model from psychology is Pavlovian Conditioning. It’s one of those topics which has appeared multiple times in many of Charlie’s speeches.
So what is Pavlovian Conditioning? It’s a behavioural trait which was first discovered by a Russian scientist named Ian Pavlov. In Seeking Wisdom , Peter Bevelin describes Pavlov’s experiment –
The Russian scientist Ivan Pavlov studied the digestive system of dogs when he observed that a stimulus unrelated to food made the dogs salivate. In one experiment he rang a bell just before giving food to the dog. He repeated this several times until the dog salivated at the sound of the bell alone. No sight or smell of food was present. The sound of the bell produced the same response as the food. The dog learned to associate the bell with food.
I realize that I’m not much different from Pavlov’s dog. Everytime I order a pizza, I start drooling when the doorbell rings. I wonder if it’s Pavlov standing on the other side of the door holding a bell and a notebook instead of hot pizza.
The conditioning works to trigger negative emotions also like fear. Bevelin adds –
Experiments have shown that we can learn to fear a harmless stimulus if it is paired with an unpleasant one. If for example rats consistently receive mild electrical shock after hearing a tone, the rats learn to develop a fear of the tone alone.
A Manipulation Tool
In his seminal work, Influence , Robert Cialdini talks about his friend who was having trouble selling a certain kind of turquoise jewellery. In spite of trying all sales tricks and marketing gimmicks she couldn’t move the sales. One fine day her staff, by mistake, changed the price tags for those turquoise pieces to double the original price. To their surprise, because of this increased price, the stock was sold out in a day.
How do you explain this strange behaviour from her customers? Well, Pavlov just told us.
The customers, with little knowledge of turquoise, were conditioned to associate high price with high value. These were the people who had been brought up on the rule “You get what you pay for”. Their conditioning led them to mistake the high price (bell) for quality (food) and they swooped down(salivated).
There is one place in the world where Pavlov is secretly revered like a god. Can you guess?
Well I can’t offer any supporting facts but I can say with reasonable confidence that the answer is Las Vegas or for that matter every casino in the world. Casino operators probably use almost every kind of behavioural trick to keep the gamblers longer inside the casino because they know that the longer the game continues, the larger the bets. Large rooms, noisy and flashy machines, sounds of spilling coins, hubbubs of crowds, and entertaining music, along with the smells of free food, drinks and perfume, provide the essential Pavlovian vibes to encourage gamblers to stay with their games for as long as possible.
The slot machines in the casinos exploit yet another behavioural bias called Variable Reinforcement , which is another form of conditioning, also known as Operant Conditioning(OC). In Pavlovian conditioning the response(salivation) is involuntary whereas in OC it’s a conscious decision on the part of subject. Like a rat falsely associating a lever press with supply of food and keeps pressing the lever endlessly.
In 1996 Charlie Munger delivered a talk titled Practical Thought on Practical Thought . In this talk he used the example of Coca-Cola’s business model and explained how Pavlovian association lies at the heart of coke’s strategy. Charlie explains –
The neural system of Pavlov’s dog causes it to salivate at the bell it can’t eat. And the brain of man yearns for the type of beverage held by the pretty woman he can’t have.
…we must use every sort of decent, honorable Pavlovian conditioning we can think of. For as long as we are in business, our beverage and its promotion must be associated in consumer minds with all other things consumers like or admire.
For decades, Coke’s strategy has been to create a strong association between it’s drink and ‘happiness’ in the consumer’s mind .
And it’s not just Coke but a large part of modern advertising industry has relied on Pavlovian Conditioning.
There is another interesting manifestation of this bias in the world of business, also known as “Persian Messenger Syndrome”. Here is an excerpt from Charlie’s talk on The Psychology Of Human Misjudgement  –
Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating, which includes a natural hatred for bad news…Ancient Persians actually killed some messengers whose sole fault was that the brought home truthful bad news, say, of a battle lost… [this tendency] is alive and well in modern life, albeit in less lethal versions. It is actually dangerous in many careers to be a carrier of unwelcome news.
Charlie uses the example of CBS(as warning) and explains how this problem is tackled in Berkshire –
Chairman Paley (at CBS) was hostile to people who brought him bad news. The result was that Paley lived in a cocoon of unreality, from which he made one bad deal after another, even exchanging a large share of CBS for a company that had to be liquidated shortly thereafter….At Berkshire, there is a common injunction: Always tell the bad news promptly. It is only the good news that can wait. It also helps to be so wise and informed that people fear not telling you bad news because you are so likely to get it elsewhere.
Charlie Munger has his own nomenclature for most of these biases including Pavlovian Conditioning which he calls Influence by Mere Association.
One of the ways Pavlovian Conditioning shows its effect in investing is when investors start associating indexes to be the true and accurate representation of the whole economy. Remember the indexes don’t necessarily reflect the whole world of stocks. It’s just a collection of few companies based on their market capitalization.
When the Sensex/Nifty falls (akin to Pavlov ringing the bell), it triggers a conditioned response (panic or fear akin to salivation) in investors and without even investigating the business fundamentals of the stocks in their portfolio they start selling.
Another interesting implication of classical conditioning is a tendency to classify businesses as stereotypes. In his recent lecture in Google , Professor Sanjay Bakshi explained how hostile stereotyping by Mr. Market can have wonderful consequences for the value investor.
Exploiting Pavlovian Conditioning
So far our discussion has hovered around unintended and mostly undesired outcomes of pavlovian conditioning. In the spirit of inversion  let’s see if we can exploit this behavioural quirk for our benefit.
Awareness about classical conditioning can be very useful for creating good habits or breaking bad habits. Once you can identify the cue which triggers the associated conditioned response you can easily break the routine and replace the bad habit with a good one. Charles Duhigg, author of Power of Habits , explains this idea brilliantly in this video .
I suspect that towards the end of his research, Mr. Pavlov was probably getting manipulated by his dogs. My suspicion was later confirmed by this image which I found on the internet.
The world around us is changing pretty fast and the modern computers are becoming cheaper, faster and more intelligent than ever which means they are ready to replace a large part of human workforce.
The day is not far where our work and skills will be threatened by an artificial intelligence. So to stay relevant, we need to make sure that we remain valuable to the society in a way which can’t be substituted by a robot. And there is just one way to do that – become a learning machine.
My friend Jana Vembunarayanan recently delivered a thoughtful lecture to young university students in Chennai . The lecture made me realize the urgency of task i.e., acquisition of worldly wisdom. Charlie Munger has been saying the same thing for years –
I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.
Of course the best way to start the process of lifelong learning is to master the fundamentals. The big ideas from the major disciplines. The cognitive framework that you build using these big ideas is what Charlie Munger has dubbed as Latticework of Mental Models.
Nobel Laureate Herb Simon writes –
The better decision maker has at his/her disposal repertoires of possible actions; checklists of things to think about before he acts; and he has mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decision arise.
By sharing my learnings through this Latticework series, I have embarked on a journey to accelerate my own learning process. I sincerely hope that in my quest to seek worldly wisdom the reader also benefits.
Take care and keep learning.