Why You Should Pay Attention to Your Environment

What’s going on around you is influencing your daily decisions much more than you realize.
  • Transcript

TRANSCRIPT

Question: How does what’s going on around us affect our investment strategies? 

Michael Mauboussin: A lot of us like to think of ourselves as being independent and objective and fact-based. But, in reality, a lot of what we decide is influenced by what’s going on around us and sometimes just random things can influence those things. So to give you a couple of examples to bring this point home; the first is an experiment I do with my students up at Columbia Business School. We do this the very first day of class: I ask them to write down the last four digits of their phone number—it’s a random thing and they all write that down. And then I ask them to go on to estimate how many doctors there are in Manhattan. They obviously know these are completely unconnected numbers, but it turns out, very consistently, with people who have low-ending phone numbers guess relatively low number of doctors, this year they guessed 14,000. People with high ending phone numbers guess a much higher number, this year they guessed about 26,000 and then people with middle phone numbers guess something in the middle; this year it was about 17 or 18,000 doctors. So they are clearly anchored based on their phone number, even though they know it has nothing to do with that. So there’s one example of this notion of anchoring. And by the way, that’s a contrived anchor that was one that I threw into them. 

But in life, there are many natural anchors as well, so if I asked you a question like, "At what temperature does vodka freeze?" you may not know the answer, but you’d probably know at water freezes at 32 degrees Fahrenheit, you know that vodka is an alcohol, so it’s likely lower than that and you’d probably go down, down, down. But still, you probably wouldn’t go down far enough; you’d stay too close to that anchor. So anchoring is one great example that you’re influenced by what’s happening or some recent piece of information. 

The second experiment I love on this—and this is obviously an auditory thing—is an experiment they did with wine. So researchers went to a supermarket and they set up the wine section with French and German wines, roughly matched for price and quality and they put a little French flag and a German flag so people would know and then over a two week period, they alternated playing French and German music; distinctively French and German music to see what happened. And it turned out when they played French music, people bought French wine 77 percent of the time. And when they played German music, people bought German wines 73 percent of the time. So this is a remarkable outcome. 

What’s interesting is as the consumers were checking out, the researchers went up to them and said "Hey, can we ask you a couple of questions?" Sure. "Did you hear the music today?" And they all say "Yes, I heard the music." They say "Did the music have any influence on your purchase decision?" and remarkably nine out of ten people say "No." So again, this was an extraordinary observed influence, but somehow not captured in people’s consciousness. 

So the point is that we are constantly bombarded with things like anchors or situations that deeply influence how we decide and it’s somehow below our level of consciousness. So, I mean, the question is what do you do about that? And I guess there are a couple of things I would say is one is to the degree that you’re able to do this is to be hyper-aware of what’s going on around you as you’re deciding. Really soak in the environment, soak in what other people are doing and ask yourself as bluntly as you can, "Is this influencing my decision for the better or for the worse?"

The second thing is to recognize that—and this is especially true for executives or leaders in organizations—is to recognize that you are creating a decision-making context for others. So how you set up the environment, the kinds of questions you pose, even physical layouts of offices, can influence how people decide. And again, you’d love to have the people that work with you be objective and fact-based, but that decision-making environment is very much something that can be contrived and manipulated for better or for worse. 

Recorded on May 14, 2010
Interviewed by Jessica Liebman