Monday, July 26, 2010

Using Two-Tiered Canvassing to Generate Support Where There Previously Was None

In Influence: The Psychology of Persuasion by Professor Robert Cialdini, the author identifies how someone attempting to exert influence over another person can do so by getting said person to identify with a certain idea or group prior to the actual meat of the requested action.  In the book, the particular example involved the difference in agreement rates for putting up a massive "be safe and wear seat belts" sign in the person's front yard.  What was noted was people had dramatically higher rates of saying "yes" to the absurd sign in their front yard if they had previously been approached by a canvassing team asking them to sign a list that they felt seat belts should be worn for safety.

Are you anti-safety?

Signing the petition seemed pretty innocuous, and most people would not be too opposed to identifying as pro-seat belt and pro-safety.  With this simple action, however, those who signed in their minds began to identify with this cause and began to see themselves as agents for it.  Because of this decision and the personal identification which took place afterwards, the second request did not seem terribly ridiculous.  When approached and asked if they would put this sign up in their front yard, those asked did the mental equation of "I'm in favor of safety" and because of it were much more likely to agree to the large sign.

How This Can be Applied

With the California prop voting coming up in November, there are several special interest groups that will be trying to garner popular support for their proposition going in to the voting process.  For the sake of conversation, let us look at one of the the most polemic of these propositions: legalizing marijuana (Proposition 19).

Now how could Cialdini's identified phenomena be used to actually make the public more favorable to this proposition?  One methodology would be to first approach potential voters in a canvassing effort and request that they sign a pro-free choice or pro-freedom petition.  Reasons given for the request could be that the group is trying to help the people show the government that they feel that citizens should have the ability to make free choices without government interference.

Presumably, with this decision to sign the seemingly innocent "pro-freedom" petition,  individuals approached would be linking themselves in their minds to being pro-free choice and as agents for this cause.

When approached, ideally the next weekend, by another canvassing group asking them to sign a petition saying that they feel people should have the right to choose whether to smoke marijuana on their own without government interference, the suggestion should be couched in terms of freedom and personal choice.  The jump could potentially be too large for many to make, between "freedom" supporter and "freedom to smoke marijuana" supporter, but I would guess that one would receive much more positive responses to the second request after the initial one.

The Approach Can be Two-Sided

Continuing with the marijuana proposition, opponents to prop 19 could have a two-tiered canvassing approach of first approaching potential voters and asking them to sign an "anti-drugs" petition.  This seems incredibly innocent and simple, and I would be surprised if there was too much resistance to it.

By signing the petition, individuals would be creating a link in their minds between themselves and the anti-drug cause.  This could be exploited in a proceeding canvassing effort with the petition to be anti-legalized marijuana.

Why Do People Need to Sign Something?

One of the important items in Cialdini's book is the associative significance of signing your name, and even better, if your position is to be visible by other members of your community.  While simple, the act of signing your name creates a very strong link in your mind, much stronger than a simple verbal 'yes' or 'no'.

While it involves more time and resources, the two-staged canvassing process can be used to create supporters where there were previously none.

Sunday, July 25, 2010

The Human Compulsion to Seek Short-Term Patterns When Investing

One of the details I always comment on when I am reading articles on Seeking Alpha is the inclusion of 'technical analysis' or other types of short-term price prediction based on patterns. It takes a lot of different forms, some as simple as merely looking at charts (i.e. past prices of the stock graphed with time on the x-axis), and others slightly more sophisticated (read: 'mathier'). I have seen citations including Fibonacci retracement, Bollinger Bands, and of course the common 50 day and 200 day moving averages, all interpreted to derive many a different conclusion.

Typical technical analysis mumbo-jumbo

Moving averages can be informative for one's first cold look at a stock: comparing them to the security's current price more or less gives you the market's impression of the company or security. This information can also be generally gleaned from the price relation to 52 week highs and lows and stock analyst buy/sell ratings.

Beyond that, however, I see technical analysis as market tomfoolery. It is an attempt to see patterns in short-term price movements, that depending on which theory you subscribe to, can be more or less random.

The random walk theory is the classic economic perception that because markets are efficient, prices are going to follow a random walk. Here is some analysis that attempts to separate the efficient market theory from the random walk theory. In essence, the idea is that prices are explained by successive random steps in any given direction. The third link above is important because I think it reconciles the fact that a random walk can only coincide with efficient market theory if the random walk is to be short-term noise while eventually leading to the efficient market price. This of course would not support a very rigorous version of the efficient market hypothesis (EMH).

While I subscribe to a weak version of EMH, I do not necessarily believe in the random walk theory, at least in the long term. I do believe that it could explain bubbles and short term market mispricings, but in my opinion these could be better explained with behavioral finance or simply by variance around an 'accurate' price. I find behavioral finance to have more explaining power due to a presumption by a great deal of the statistical analysis in investing that markets are 'cold' and that decisions are being made by efficient automatons and not by humans (Nudge: Improving Decisions About Health, Wealth, and Happiness provides an excellent framework for understanding the difference, except where I use 'efficient automatons' they use 'econs'). Behavioral finance provides a way of explaining mispricing in the market based on human emotion and the way we perceive.

Does that mean that market participants using statistics have not been successful? Of course not. One of the best success stories I have heard of is the hedge fund Renaissance Technologies, which according to their wikipedia page has averaged a 35% annual return after expenses and as far as I know has never had a losing year. Because hedge funds are such black boxes, it is difficult to understand how Renaissance is truly making money and I am not sure how to address them as a phenomena in the short-term trading sphere. Note: there are also a large number of high-frequency trading (HFT) rigs that use some sort of fundamental or technical indicator, but I have yet to see conclusive evidence that technical trading like this can make money over a longer time period.

The question will always be whether it is not the pattern but rather some fundamental idea being observed through the pattern that is what is making money. Instead of simply finding more complicated mathematical techniques to observe the pattern as it is seen through market prices, perhaps a more effective methodology would be to understand what is causing that event.

On the frontier of simply statistical analysis, Bruce Babcock suggests that over the longer term markets trend after you have looked past short-term noise, and suggests using chaos theory to understand it. This to me seems more plausible than patterns in the short-term, however once again I think it could be better explained by behavioral finance.

Considering the relatively small amount of market data we have to pull from to make statistical assertions lends one to reject a 'patterns for the sake of patterns' investment style. Sample size limitations and a lack of fundamental reasoning for why prices should behave in any given pattern leads me in the end to reject the notions provided by Babcock. While it could be successful as a trading strategy, without any underlying reasoning why prices should adhere to a given pattern might suggest that any given 'trend' he is observing could be better explained and modeled using some other methodology. I am of the persuasion that behavioral finance, while still in its infancy, offers the best methodology for explaining long-term price variance and that the way human emotions interact with capital markets would be the only effective way of attempting to predict future market prices.

As human beings, we are equipped with an innate ability and compulsion to see patterns. It is a very effective way to attain survival in the natural world. I will agree that there are some situations in investing where patterns can be informative, but not the geometric ones used in day trading. Without any fundamental reason why prices should behave in a certain way other than observation of historical data, it would seem ludicrous to go with the patterns.

Thursday, July 22, 2010

Droid Commercials Are Missing the Mark, and Potentially Damaging

Since the new Droid X has sold out online for Verizon, one could go ahead and say that Android has been doing a good job of marketing the newest Droid phones. Here is the most recent commercial that I've seen for the Droid X, and every Droid commercial has been along the same vein: humans turning cyborg or being like machines when they use the Droid.

It's very hard to find smartphone user demographics by age group, but from what I've read around the web the typical Droid user is young, male and single. In this regard, the Droid ads seem to be hitting the mark: they are somewhat edgy and while I would not say cool, they definitely get you talking (I think they are kind of creepy, but although I am the target demo it does not matter what I think, it's what everyone thinks).

What I would like to suggest, however, is that Droid could be inadvertently shooting themselves in the foot with these commercials. For their current market, it makes total sense. But as they start to expand to some of the older generations and females, these commercials could scare off potential users. Here I breakdown why the commercial fails to bring in new demographics, and why it actually scares them away.

Older users:
- Phone appears to be scary and difficult to use. Commercials suggest you have to be a machine in order to use one, and the usability is not emphasized, if anything the ad seems to suggest "unless you're a young male, get the hell away from this phone!"

- The 'cool' machinery imagery might be a selling point, but almost all of those featured in the ads are by themselves and males. To some the commercials can be kind of scary, and the ads suggests that most of the users are loners.

This video has circulated the internet, but I think it does a great job of showing the type of misconceptions there can be regarding iPhone vs. Droid

WARNING: NSFW [Language]

While the video is of course satire, one point that I think it does a great job of bringing across is that less sophisticated users care less about the facets of the phone, and more about how it works and the applications one can use. In this regard, I think a good deal of Droid's billboards that I have seen in Portland, Los Angeles and San Francisco are excellent:

Picture soon to follow

Emphasizing this one point is very important. While the billboard does not necessarily sell viewers on the Droid, it introduces the concept that the Droid could potentially do as good or a better job as that performed by the iPhone in terms of applications.

Moreover, while the Droid adverts might be doing a great job in the near term, they are cultivating an image that the device is difficult to understand for non-tech savvy users and that it is not a sociable device (see above commercial). I strongly feel that Droid needs to shift their marketing effort to be more all encompassing with the understanding that the device will not always be able to grow in sales by finding more young, single males.

Sunday, July 4, 2010

The Impact of Corporate Social Responsibility on Executive Compensation

I figured I would put up for public viewing the paper I wrote for my senior thesis, analyzing the impact of a firm's inclusion on the KLD 400 Socially Responsible Index on its executive compensation when controlling for additional factors. The index is used as a proxy for isolating social responsibility in companies.

The paper also contains an in depth overview of behavioral finance literature as it pertains to executive compensation.

I will try and put up a more detailed abstract shortly.

You can download the paper as a PDF by clicking on the "Download" button below.

The Impact Of Corporate Social Responsibility On Executive Compensation