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Battling Investment Bias


First, recognize the most common cognitive and emotional biases that exist,


then work around them to make sound choices by Tamar Satov illustration by Maurice Vellekoop


F


OR TWO DAYS LAST OCTOBER, hundreds of people waited in line at Dundas Square in downtown Toronto, snaking toward a pastel-pink pop-up booth. Those with enough patience to queue for an hour or more were rewarded with … a doughnut. Not just any


doughnut, mind you, but a gourmet variety from a local dough- nut “boutique,” beautifully packaged in a rose-coloured house- shaped box. More importantly, the doughnut was free. The giveaway — staged to promote the Google Home Mini, a


doughnut-sized smart speaker that works with Google’s voice- activated assistant à la Apple’s Siri or Amazon’s Alexa — was a genius marketing move based on a simple human trait: we tend to grossly overvalue anything that’s free. If, for example, you were to ask the recipients of those free doughnuts if they’d wait an hour in line for $3.50 in cash (what the event’s supplier, Jelly Modern Doughnuts, charges retail for the custom version of its sweet treats), it’s unlikely you’d have any takers. Google capitalized even further on the emotional pull of free things by randomly placing a free Home Mini device, worth


28 | CPA MAGAZINE | JANUARY 2018


$79.99, in some of the boxes. For argument’s sake, let’s say you agree the possibility of getting $79.99 in cash is worth an hour of your time. What if, instead, you’re about to buy a $1,000 smartphone, and have “a chance” to save $79.99 if you line up for an hour. Would you do it? How about if you were buying a new car? Would you give up an hour for the possibil- ity of saving just $79.99 on a 30K purchase? According to traditional economic theory, we should place


an identical value on a free doughnut worth $3.50 and on $3.50 in cash, and ought to consistently value the exchange of an hour of time for the possibility of saving $79.99, regardless of circumstances. But that’s not the way the human brain works. “We’ll wait in line for free stuff, even if it doesn’t make


sense,” says Ryan Decker, an economist and professor at North Central College in Naperville, Ill. “This is why we have behav- ioural economics. People don’t act rationally.” University of Chicago professor Richard Thaler was among


the first to observe and study such behavioural phenomena — proposing innovative concepts that helped earn him the 2017 Nobel Prize in economics. He and other pioneers of behav- ioural economics, including fellow Nobel laureates Daniel


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