Sunday, January 3, 2010

The Psychology of Persuasion

Have you been a patsy to pitches of peddlers, fund-raisers, telemarketers, used-car dealers, or Madoff's Ponzi scheme? Now you can save yourself from being a sucker by reading Robert Cialdini's Influence: The Psychology of Persuasion.

In his book, he identifies six weapons of influence that cause people to comply to the request of others unknowingly.

  • Reciprocation: Research shows that there is no human society that does not feel the obligation to reciprocate. Hence, the pervasiveness of free samples in marketing - charitable organizations sending free labels to real estate firms selling timeshares offering free trips to Mexico.

  • Commitment and consistency: Once we have made a decision, and especially if we've validated that decision through public affirmation, we're loath to change our view. Cialdini offers two deep-seated reasons for this. First, commitment allows us to stop thinking about the issue - it gives us a mental break. And second, consistency allows us to avoid the consequence of reason - namely, that we have to change. The first allows us to stop thinking; the second allows us to stop acting

  • Social Validation: People will do things by observing others. For example, in one experiment, one or more confederates would look up into the sky; bystanders would then loop up into the sky to see what they were seeing. At one point this experiment aborted, as so many people were looking into the sky that they stopped the ongoing traffic

  • Liking: We all prefer to say yes to people we like. We tend to like people who are similar to us, who compliment us, cooperate with us, and who are attractive.

  • Authority: People will tend to obey authority figures, even if they are asked to perform objectionable acts. Cialdini sites the Milgram experiment as one such example. In this enlightening and unsettling human experiment, Stanley Milgram had subjects come in to play the role of a "teacher" for a "learner". The subjects asked the learner questions, and were told by a stern, lab-coated supervisor to administer progressively stronger electric shocks in return for incorrect answers. The learners would scream in pain and beg for mercy to avoid the increasingly painful shocks. Even though they were never forced to do anything, nor were they subject to reprisal, many of the subjects ended up doling out lethal shocks.

  • Scarcity: Evidence shows humans find items and information more attractive if they are either scarce or perceived to be scarce. Companies routinely leverage this tendency by offering products or services for a limited time only.

These tendencies are singularly powerful. But when they are invoked in combinations, they are even more potent and create what Charlie Munger calls lollapalooza effects. Ravi Nagarajan at Rational Walk pointed out how Bernie Madoff used three of the six Cialdini's tools of influence to first bait his victims and then reel them in and keep them quiet for years.

Social Proof: Most of Madoff's victims were Jewish and well connected in Jewish circles in New York City and Florida. Madoff had a long history of supporting the Jewish community and was active in philanthropic activities. Given that Madoff had a number of Jewish wealthy clients, others within the community naturally assumed that Madoff's firm was trustworthy. Social Proof ended up being a reason for herd like behavior within a community where Madoff was well known and respected.

Authority: Over a period of five decades, Madoff built his market making business from an initial investment of only 5000$ starting in 1960. The technology Madoff's firm developed ended up being the technology of the NASDAQ which was founded in 1971. Madoff eventually served as the Chairman of the NASD, a self regulatory securities industry organization. So naturally, Madoff had impeccable credentials and an aura of authority that could be leveraged to gain clients (or rather victims) for his scheme. Would anyone approached by a man with Madoff’s credentials question his decisions or record keeping? After all, this was a man who was heavily involved in NASD and beyond question in terms of perceived integrity.

Scarcity: Madoff did not allow just anyone into his scheme. One did not simply pick up the phone and open an account with Madoff. It was necessary to be well connected and to know the right people. If you knew the right people and if they could “pull some strings”, then just maybe you would be able to get in and have the honor of Madoff handling your assets. This may seen absurd in retrospect, but the perceived scarcity of Madoff’s services and the fact that only the elite could get in served to create the aura of exclusivity that so many people crave. After all, if you could not say that you were invested with Bernard Madoff, what would your friends at the country club in Palm Beach think of you? This is social proof and scarcity wrapped into the same package.

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