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Who's in the Video
Michael Mauboussin is the chief investment strategist at Legg Mason Capital Management. Before joining LMCM in 2004, he was a managing director and chief U.S. investment strategist at Credit Suisse.[…]

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

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

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

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

The second experiment I love on this—and this isrn obviously an auditory thing—is an experiment they did with wine. So rnresearchers went to a supermarket and they set up the wine section with rnFrench and German wines, roughly matched for price and quality and they rnput a little French flag and a German flag so people would know and thenrn over a two week period, they alternated playing French and German rnmusic; distinctively French and German music to see what happened. And rnit turned out when they played French music, people bought French wine rn77 percent of the time. And when they played German music, people boughtrn German wines 73 percent of the time. So this is a remarkable outcome. 

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

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

Thern second thing is to recognize that—and this is especially true for rnexecutives or leaders in organizations—is to recognize that you are rncreating a decision-making context for others. So how you set up the rnenvironment, the kinds of questions you pose, even physical layouts of rnoffices, can influence how people decide. And again, you’d love to have rnthe people that work with you be objective and fact-based, but that rndecision-making environment is very much something that can be contrivedrn and manipulated for better or for worse. 
Recorded on May 14, 2010
Interviewed by Jessica Liebman