Blogs | September 11, 2018

Check your point of view when funds are at stake

You might avoid costly investing or negotiating errors by remembering to put yourself in others’ shoes, notes Chris Dillow.


It’s an annoyance you might well have experienced while stuck in holiday traffic. You see the next lane moving quicker so you change lane, only to see the lane you’ve just left move faster.

What’s probably happening is that everybody else in your lane had the same problem and same answer as you. As you saw space, so did other drivers, with the result that the space disappeared in the lane you joined and emerged in the one you left.

“It’s all about me”
The University of Haifa’s David Navon calls the mistake “egocentric framing” – a failure to see things from others’ points of view. It can be a costly error.

Imagine I gave you and a stranger in a separate room an envelope each. I tell you both that there is £10 in one and either £5 or £20 in the other. I then offer both of you the chance to pay me 10p to swap envelopes. Do you accept the offer? You might well do so.

You might think: “I have a 50% chance of losing £5 and a 50% chance of making £10. That’s an expected net gain of £2.50. It’s worth paying 10p for that.” Having swapped, I then make you the same offer. And because the thinking is the same, you accept again. I’ve made 20p for nothing.

Obviously, you made a mistake. You shouldn’t think only of your own potential gains.

What do others want?
You should instead consider what the other person might be thinking. If he or she is willing to swap envelopes with you, maybe you shouldn’t swap. You can’t both be right. If you frame the question egocentrically, you may lose.

If you can see it from the other person’s perspective as well, you may be less likely to err. You might think this is obvious. It’s not. It happens in stock markets all the time. In his book Lying For Money, Dan Davies describes retail investors as “dumb money”.

Professional investors like to take the opposite side of their trades because they’re confident that retail investors know less than they do as professionals. And in fact, investors who trade a lot typically lose money by doing so.

Investing isn’t only about what you think. It’s about what the other side of the trade thinks as well, says Chris Dillow

Think more broadly
Meir Statman at Santa Clara University says this is because they adopt the wrong mental frame.

They ask “is this stock attractive?” when they should be asking “does the person on the other side of this trade know more than I do?” They have an egocentric – or self-centred – frame when they should in fact be considering other people’s points of view.

This mistake is especially big in the case of newly-floated stocks. We have overwhelming evidence that these do badly in the months after flotation. This happens because the owners of the business pick the best time to sell them – a fact which investors don’t appreciate. If they asked “why do the people who know this business best want to sell it now?” they’d save themselves lots of money.

In not asking this, they’re making the egocentric framing error. Investing isn’t only about what you think. It’s about what the other side of the trade thinks as well.

Everyday wars
In this sense, investors can learn from military commanders who ask: “What would I do if I were the enemy?” Putting yourself in the enemy’s shoes can help you see his or her strengths and weaknesses.

It’s not just in investing that this helps us. It can also help in our everyday negotiations with our partners or employers. In their classic book Getting to Yes, Roger Fisher and William Ury say: “The ability to see the situation as the other side sees it, as difficult as it may be, is one of the most important skills a negotiator can possess.”

Win-win by value
Matters that seem trivial to you can be important to them, and vice versa.

Realising this can avoid conflict, and finding something that the other side values a lot but which you are willing to give up can give you a way to win yourself. We live in what the historian Christopher Lasch called an age of narcissism. Such narcissism – in the sense of a focus upon oneself and failure to put oneself into others’ shoes – can, however, cost us money.

InvestingBiasFraming

Chris Dillow
Chris Dillow

Investors Chronicle writer and economist