Deprival Syndrome

7. DEPRIVAL SYNDROME

You don't change something people love.

• Faith Popcorn (American futurist)

We have an aversion to loss. We dislike losing the things we have more than we appreciate gaining the things we don't have.

When something we like is (or threatens to be) taken away, we often value it more highly. Take away people's freedom, status, reputation, money or anything they value, and they get upset. We don't like to lose the freedom to choose how to act or believe or what to have. For example, people are likely to fight a restrictive law that takes away a benefit they have enjoyed for a long time. The more we like what is taken away or the larger the commitment we've made, the more upset we become. This can create hatred, revolts, violence and retaliations.

How do people react when we try to lower their income?

Charles Munger illustrates the power of deprival when negotiating takeaways in labor negotiations:

1. You're facing deprival super-reaction syndrome - people just go bananas. And (B) the union representative has to bring his members the deprival message and endure the Pavlovian mere-association hatred that results. Therefore, he won't do it - largely for that reason. So you have two powerful psychological effects making it hell.

All of those strikes in the late 1800s and the early 1900s where Pinkerton guards were shooting people were about takeaways. Arriving immigrants were willing to work cheap. And capitalist proprietors tried to reduce wages - sometimes because they felt they had to because their competitors were doing it and sometimes because they simply wanted to make more money. At any rate, all of that murder and mayhem was the result of deprival super-reaction syndrome plus the reality that nobody wanted to be the carrier of bad news.

'1 shou/,d take the conservative approach. Failure is embarrassing and may get me fired " People's aversion to losing may make people overly conservative or engage in cover-ups.

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The doctor told Mary: "You may die if you do not change your behavior. "

Our loss aversion makes us more sensitive to information that has negative implications for us. For example, health-related messages can either focus on the benefits of performing an act (gain) or the possible costs of not doing it (loss). One study cited here found that women were more likely to engage in breast self examination when they were presented with information emphasizing the possible negative consequences (loss of good health, longevity) of not performing self-examination compared to information that focused on the benefits of doing it. Other studies show that when persuading people to undergo risky medical procedures, it is more effective to focus on positive outcomes (e.g. survival rate) than negative ones (e.g. mortality rate).

john tells Mary: '1 can't sell the stock now. I have to wait until it gets back up to what I paid for it. Anyway, I don't realize a loss unless I sell. "

We hate to admit we've lost money. Our loss aversion contributes to status quo bias - we prefer to hang on to what we have. We even put a higher value on the things we already own than we are willing to pay for the same things if we didn't own them (giving them up feels like a loss). This is why many companies offer money-back guarantees on their products. Once we have taken possession of some item, we are not likely to return it.

Charles Munger says, "The deprival super-reaction syndrome of man helps cause much ruin as people's cognition is distorted as a result of their suffering losses and seeing near misses." We hate to sell losing stocks. It is the same as admitting to others and ourselves that we've made a mistake. We therefore hold on to our losers too long and sell our winners too soon. A realized loss feels worse than suffering the same loss on paper. The pain of feeling responsible for making a bad decision also plays a role (regret). The stock may bounce back after we've sold. And the more money and effort we've put in, the harder it is to let it go.

We also feel that losing the opportunity to make money is less painful than losing the same amount of money. Forgoing an available $100 gain and suffering a $100 loss have the same effect on wealth when measured against the same alternative. A gain that looks obvious in hindsight was not necessarily available or foreseeable.

john's friend Allan bought a house five years ago for $200,000.

Four years later, Allan's company moves to another city. The local real estate market is depressed. He is offered $170,000 but feels he can't afford a loss. So he waits another year and this time the offered price is $150,000.

Isn't it better for Allan to concentrate on what the house is worth rather than on what he paid?

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John kept pouring dollars in the machine. ''I got Cherry, Cherry, Bar. Tm close now. " We want and place higher value on something when we almost have it and lose it. Charles Munger says, "One reason why horse races, bingo and these things have always been so popular is because of all these near misses." Frequent near misses are like small reinforcements and make us want to try again and again.

Just as people take larger risks when threatened, after a loss, we want to catch up, so we end up taking more risks to get even. But as Warren Buffett and Charles Munger say:

Buffett: A very important principle in investing is that you don't have to make it back the way you lost it. In fact, it's usually a mistake to try to make it back the way you lost it.

Munger: That's the reason so many people are ruined by gambling - they get behind and then they feel like they have to get it back the way they lost it. It's a deep part of human nature. It's very smart just to lick it - by will...

Buffett: One of the important things in stocks is that the stock does not know that you own it. You have all these feelings about it: You remember what you paid. You remember who told you about it - all these little things. And it doesn't give a damn. It just sits there. If a stock's at $50, somebody's paid $100 and feels terrible; somebody else has paid $10 and feels wonderful - all these feelings. And it has no impact whatsoever ...

John and Mary's daughter didn't want the toy they gave her; she wanted the toy they didn't give her.

Michel de Montaigne said: "To forbid us something is to make us want it." We want what we can't have. Forbidden fruit tastes best. Mark Twain said, "It was not that Adam ate the apple for the apple's sake, but because it was forbidden. It would have been better for us - oh infinitely better for us - if the serpent had been forbidden." Forbid someone to do something and they find it more attractive than they did before it was forbidden. For example, when Miami banned the use of phosphate-based detergents, people turned to smuggling in supplies and hoarding (since fear of scarcity encourages hoarding) and even rated the banned products as better than before.

"Since a real estate lot in this area is both rare and hard to obtain, I want it. "

We may place a higher value on what is scarce or unique. We want what is (or threatens to be) less available. The less available it is, the more we desire it. That's why we subscribe to newsletters containing exclusive and restricted information. And why we participate in initial public offerings and buy stocks on hot tips.

We may value things that have recently become less available more highly than things that have

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been scarce all along. We fall for limited offers and deadlines like,"The offer ends at midnight. We only have a few left. This is the last chance. "By making things less available, merchants make them seem more valuable.

lot of people are competing for this lot at the auction."

How do we create demand? Create competition. Make people perceive there is a huge competition for the item and limit the number of people that can participate in the bidding. If others want what's scarce, we want it even more.

When we can't get something, we lower our opinion of it. When we can get something that others don't want, we don't want it either.

Keep in mind

• Know your goals and options. Ask: Why do I want this? For emotional or rational reasons?
• What you paid for your house, stock, or car has no relevance to its value. If the

value is below what you paid, you don't have to get even. If you bought a stock for $100 and it is now $50, you should sell it, if it is not worth more than $50. Ask: Suppose I hadn't made the investment, would I make this investment today at today's price?

• Remember that people respond to immediate crisis and threats. Anything that happens gradually, they tend to put off. Framing a choice as a loss or a gain can influence willingness to take risks. Examine both frames and the actual alternatives before deciding how to act.
• Charles Munger shows how we can use the force of deprival to persuade (for a reputable reason):

In Captain Cook's day, he took these long voyages. At the time, scurvy was the dread of the long voyage. And in scurvy, your living gums putrefy in your mouth - after which the disease gets unpleasant and kills you. And being on a primitive sailing ship with a bunch of dying sailors is a very awkward business. So everybody was terribly interested in scurvy, but they didn't know about Vitamin C. Well, Captain Cook, being a smart man with a multiple-model kind of approach, noticed that Dutch ships had less scurvy than English ships on long voyages. So he said, "What are the Dutch doing that's different?"

And he noticed they had all these barrels of sauerkraut. So he thought: 'Tm going on these long voyages. And it's very dangerous. Sauerkraut may help." So he laid in all this sauerkraut which, incidentally, happens to contain a trace of vitamin C. But English sailors were a tough, cranky and dangerous bunch in that day. They hated "krauts". And they were used to their standard food and booze. So how do you get such English sailors to eat sauerkraut?

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Well, Cook didn't want to tell 'em that he was doing it in the hope it would prevent scurvy - because they might mutiny and take over the ship if they thought that he was taking them on a voyage so long that scurvy was likely.

So here's what he did: Officers ate one place where the men could observe them. And for a long time, he served sauerkraut to the officers, but not to the men. And then, finally, Captain Cook said, "Well, the men can have it one day a week."

In due course, he had the whole crew eating sauerkraut. I regard that as a very constructive use of elementary psychology. It may have saved God knows how many lives and caused God knows how much achievement.