The Dan Ariely Series: The Muddy Charles

I’d like to conclude the Dan Ariely Series by thanking both both John Mihaljevic and Dan Ariely for the inspiration to share with you a subject that I truly enjoy. Now back to a couple of experiments conducted by Dan.

First, the Muddy Charles experiment, one of two pubs at MIT, is a famous and a very popular place as I understand it. Here Dan and researchers approach unsuspecting students and ask them to sample two brews: one is known as MIT Brew and the other a commercial brew. The students in a blind taste test are asked which of the two brews they prefer to have a full glass of.

Let me let you in on a secret. The MIT Brew is just commercial beer laced with balsamic vinegar. The other is just a commercial beer.

What are the results? [Drum roll] On average, most participants preferred the MIT Brew to the commercial brew.

So Dan turns the experiment around and now tells the pub-goers beforehand, that here are two brews: One is a commercial brew, and the other is balsamic vinegar-laced commercial beer. Then asks them to taste and choose which one they prefer a full glass of.

Now what do you think happened, Oh wise one? [Another drum roll] on average, most participants preferred the commercial brew and were disgusted with the balsamic vinegar-laced beer.

Our expectations change our decisions. The way we anticipate something changes the way we perceive it and experience it. Our brain works to influence our perception. Our preconceived notions color the world we see around us. Our brain, our mind keeps trying to predict the future. As it tries to predict the future, it changes our physiology. It makes us experience the reality we anticipate. The reality we end up experiencing is partially a function of what we anticipate.

Let me bring this point home as it relates to the world of investing with the wise words of Benjamin Graham. In this video from Columbia’s Heilbrunn Center, Benjamin Graham explains price fluctuations in the stock market:

‘… the explanation cannot be found in any mathematics, but it has to be found in investor psychology. You can have an extraordinary difference in the price level, merely because not only speculators, but investors themselves are looking at the situation from rose-colored glasses rather than dark-blue glasses…’

Here’s Dan talking about the balsamic vinegar experiment and there’s a funny surprise at the end 🙂

The second experiment is about the half-life of Coke. Dan and researchers leave six-pack of Cokes randomly in the common kitchen refrigerators all over campus. They keep a record of how long it takes for the Coke to disappear. It turns out that in a few days, all the Coke was gone.

As you can probably imagine, every one of these common kitchens had a vending machine with Coke ready to be dispensed for a dollar. So Dan takes plates with six one dollar bills and places them in refrigerators across campus. He thought this would make it easy for students wanting Coke to just take a buck, insert into the vending machine and ‘Taste the Feeling’.

It didn’t work! Not a single dollar went missing. It turns out we don’t treat stealing money and stealing ‘tokens’ or ‘widgets’ the same way. Think credit cards, think backdating stock options, think Enron, etc…

Let me conclude with a couple quotes from Dan:

‘One of the challenges of Behavioral Economics is that people behave in all kinds of ways, often in ways that either don’t seem to make sense or don’t seem to be in their long-term best interest… if we can understand  some of the barriers that people have, we can build a mechanism. Much like building a bridge, we need to understand the terrain and what’s going on. We can’t tell people to just go over the cliff, we need to understand exactly what’s missing, and the same goes for changing human behavior.’

and

‘…using these principles [of Behavioral Economics] wisely, we might be able to design a better world’

Thank you!

The Dan Ariely series are inspired by:

John Mihaljevic of the Manual of Ideas. John Mihaljevic, CFA, is author of The Manual of Ideas, the bestselling book on value investing.Manual of Ideas.John is also founder of MOI Global, an invitation-only membership community of intelligent investors. It publishes the Manual of Ideas, “the very best investing newsletter” (Pabrai). John is also a managing director of ValueConferences, the series of fully online investment conferences for sophisticated investors. He has also served as managing partner of investment firm Mihaljevic Capital Management LLC since 2005. He is a member of Value Investors Club, an exclusive community of top money managers, and has won the club’s prize for best investment idea. John is a trained capital allocator, having studied under Yale University chief investment officer David Swensen, and served as research assistant to Nobel Laureate James Tobin. John holds a BA in economics, summa cum laude, from Yale and is a CFA charterholder.
and
Dan Ariely of Duke University. Dan is the James B. Duke Professor of Psychology and Behavioral Economics at Duke and a founding member of the Center for Advanced Hindsight. Dan’s books, Predictably Irrational, The Upside of Irrationality, The Honest Truth About Dishonesty, are NY Times best sellers. Dan also has a podcast “Arming the Donkeys”. A new book by Dan and Jeff Kreisler is expected to go on sale November 11 2017 titled Dollars and Sense.