Investing and the power of 'priming'

The process of ‘priming’, often seen in advertising, taps into the bias in one’s decision-making. Nick Armet explains this process has implications for investors and their sentiment.

If you see an advert showing a nice sunny beach on television, you might find yourself popping into the travel agents later that day without giving too much thought to the reasons why.

You may not have realised it, but the advert made you more susceptible to making the decision to enter the travel agent. Advertising has always attempted to exploit this bias in our decision-making via something called priming.

Priming is where you are exposed to a stimulus that influences your response to a later stimulus. Primes can be spoken or written words, visual images, or even smells.

The effect was first noticed by behavioural psychologists in word fragmentation exercises.

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For example, if you are exposed to the word EAT (or images of food), you are more likely to complete the fragment SO_P as SOUP than as SOAP.

The opposite would be the case if you had just been primed with the word WASH. EAT primes SOUP and WASH primes SOAP.

Priming acts at a sub-conscious level rather than as something consciously noticed or retrieved from memory.

So, people don’t necessarily know why they answered SOUP; indeed, on prompting, they will often construct other reasons as to why they picked a specific word.

The effects of priming can be surprisingly powerful. A famous experiment by John Bargh showed that priming can have significant physiological effects.

A psychology professor at Yale, Bargh conducted an experiment in which the subjects were primed with words related to the stereotype of elderly people (words such as ‘forgetful’, ‘grey’, and ‘wrinkle’).

The object of the experiment was simply to measure how quickly the subjects walked down the corridor upon leaving the testing booth.

Incredibly, those who were primed with words associated with the elderly walked much more slowly upon exiting the testing booth than those who were primed with neutral stimuli.

In a similar experiment, priming participants with words such as ‘fit’, ‘active’ and ‘athletic’ made them significantly more likely to use the stairs instead of the lifts. 

Experiments also show that people begin to react favourably to words and ideas that are simply repeated to them. 

This has significant implications for investors in an age where coverage of investment markets is widespread, continuous and detailed and the stories driving markets seem to take on a life of their own. 

Given our susceptibility to priming, we should be careful about becoming a slave to these narratives. For one thing, markets historically bottom before the news flow turns positive.

This presents a real difficulty for investors who may have spent the preceding few months being primed on a daily basis by just how irretrievably bad things have become.

In such circumstances, priming is telling us not to invest – despite the fact that share prices may have fallen to attractive levels, meaning there is value in taking a contrarian view. 

There have been some interesting priming experiments on the subject of money, led by the psychologist Katherine Vohs.

Her work suggests that when people have money on their mind, they become more self-sufficient and self-serving, showing a preference for working alone, as well as reduced helpfulness towards others.

For example, subjects primed with monetary triggers (such as a stack of Monopoly money on a table or a picture of currency on a screensaver) preferred to work alone and put more physical distance between themselves and a new acquaintance.

When an experimenter dropped some pencils, the money-primed participants picked up far fewer pencils than the unprimed subjects. 

It is quite shocking to many people that our actions can be so materially affected in this way by primes. Yet these types of effects have been repeatedly proven in studies and it is highly likely that you are susceptible too. 

Priming has implications for investors.

When we start to think about investment and become subject to monetary primes within the financial world, we may have a positive desire to become more self- sufficient which can be a good thing.

However, that self-sufficiency comes with human emotions of greed and fear and a full range of cognitive biases.

As value investor Benjamin Graham was the first to point out back in the 1930s, “the investor's chief problem – and even his worst enemy – is likely to be himself”.

So, what can we do about it?

One solution is to buy into an investment process as a defence against behavioural biases.

By adhering to a consistent, repeatable investment approach or philosophical framework (or an investment manager who does), we can take the emotion out of investment decisions. 

Today it is common to hear sportsmen talk about process over outcome – they want to avoid becoming overawed by events by focusing on the repeatability of the processes they have learned through training. The same distinction is incredibly valuable in investing.

By focusing on process – investing in small companies only at attractive valuations, or investing in larger companies that pay a sustainable or growing dividend, for example – investors can stick to a system that limits susceptibility to priming and a range of other decision-making traps that often dog the less-experienced investor. 

Without an investment process, investors are more likely to be drawn into the shifting stories that move markets, and more likely to be tempted by the latest fads and fashions. 

It was contrarian value investor Sir John Templeton who famously said, “it is impossible to produce superior performance unless you do something different from the majority”. 

Of course, it is easy to subscribe to the view that we should buy when others are most despondently selling, but more difficult to actually do it. 

To overcome ourselves and our emotions, an investment process that acts as a constant rudder – or investing with a manager who has a process that you understand and subscribe to – is vital for navigating a difficult investment landscape that is typically made more treacherous by our own emotions. 

Nick Armet is the investment commentator at Fidelity Worldwide Investment.