What is "Nudging"? What does it mean in stock investments?
Nudging Nudging Nudging...
"The untrained brain dislikes the feeling of being alone with itself, so most of us need a little 'nudging' in a 'non-coercive' way to help us make better decisions.
Examples of Nudging in Investing:
Just as waiting for the next subway stop without looking at your phone can be agonizing, many people feel uneasy about doing nothing when it comes to stock market investments.
Due to the discomfort of being alone with our thoughts, we need simple ways to resist the psychological fluctuations and potential impulsive dangers that come with investment boredom.
You might not pick up a random coin on the street, but you'd eagerly grab a WeChat red envelope with the same amount. The difference lies in our internal evaluation of money earned through different means.
For instance, if you bought 100 shares of Guizhou Maotai (one of the best assets in China) at ¥300 each and, after about two years, Maotai's price rose to ¥500 per share, you would be happy but also aware that it took two years to achieve this return (which is already quite high).
Simultaneously, if you sold Maotai and bought shares of iFlytek(a voice recognition software company), which saw a rapid increase in a short period, you would likely be ecstatic. Even if the overall return is not as high as Maotai, you would be more excited about the money earned from iFlytek.
I often made mistakes in investments when I was in an excited or euphoric state. Whether it's fear or greed, both are detrimental to long-term investing.
Though I wasn't aware of 'Nudging' at the time, I placed a few sheets of paper on my wall with words like 'Patience,' 'Logic,' and 'Calm.' Like fly stickers in a urinal, whenever I traded any stocks, I unconsciously glanced at these words on the wall. Though simple, these reminders likely, over time, subconsciously altered my behavior.
Nudging is also effective in corporate analysis. Consider this recent example:
If someone sets up a stall selling umbrellas at a subway station entrance on a rainy day and charges double the usual price, they'd likely be criticized for profiting from people's misery.
However, if the umbrella price doubles due to a rise in raw material costs caused by heavy rain, consumers are less likely to condemn the seller.
In the investment realm, Netflix is preparing to raise prices for its most popular service. Yet, past experiences suggest that consumers are not sensitive to Netflix price increases. A $1-2 monthly price hike doesn't deter most users, especially when it comes to exclusive content like 'House of Cards' or 'Stranger Things.' For these loyal viewers, the increased cost is insignificant compared to the value of the experience.
Similar strategies are being employed by other streaming services like HBO, Hulu, Amazon Prime, and Disney, which plans to launch streaming platforms for ESPN and Disney movies.
Understanding how companies can slowly raise prices without losing customers is crucial, and the concept is akin to how Coca-Cola has increased prices over the past century while continuously gaining more users.
Companies like Tencent, Alibaba, Amazon, Google, Facebook, and Netflix can gradually increase prices while enhancing the value of their services, ensuring long-term returns as the market evolves.
How can we better nudge ourselves and others?
I'm sometimes lazy, and even though I know that prolonged sitting and inactivity are detrimental to my health, it's challenging to motivate myself to exercise because my brain's automatic system doesn't perceive an imminent crisis.
But the fact is, I don't dislike exercising. I feel invigorated after each workout. So why don't I find ways to help myself exercise?
I like to monitor my weight and use electronic devices to track my daily activity. However, it doesn't make a difference. I won't exercise just because my smartwatch shows that my activity level is below average, and I won't take a break from a busy schedule to exercise for 5-10 minutes just because my phone suggests it every hour.
However, if my smartwatch doesn't say, 'It's been a while since you exercised, get up and move,' but instead says, 'Because you've been sitting for over 2 hours, your life expectancy is reduced by about 1 hour,' I might jump up immediately to exercise.
We are not rational creatures, no matter how much we aspire to become rational beings.
This is true; otherwise, why do signs in wildlife parks that say 'Do Not Exit the Vehicle' not perfectly deter people from getting out of their cars when there are repeated incidents?
If the sign said, 'Wildlife may carry deadly bacteria; please do not exit the vehicle' or 'I know what you're thinking; the last person who wanted to get out is now in the tiger's belly,' more effectively nudging language might yield better results.
Nudging has applications in various fields because our brains are so automatic and inefficient. Sometimes, we have to train ourselves, investing more energy and time to achieve better decision results.
Alright, you've read this far, and if you don't exercise now, you might lose 15 minutes of life expectancy. Get up and move around!"