You Are Not Discounting Risk Logically. Your Brain Is The Cause.

Every top-tier investment banker is a master at getting CEOs to like them. And you may think that it’s the numbers, the fees, or the skills but I’m telling you you’re wrong.

If you’ve dealt with a salesperson at the top of their field, you’ve been worked on by this and probably never noticed. But what you may not know is that you and I are hardwired to fall for it. And it may be costing you money.

I’ve lived this firsthand. I have gone through trainings and sales coaches teaching methods to weaponize this. How to align to a person. How to mimic what they say. And even why you should hold your drinks in your left hand, so that when you shake someone’s hand it feels warm and inviting, not cold.

Robert Cialdini named this Liking in Influence: The Psychology of Persuasion. We favor people that are kind to us, that are agreeable, that are outgoing and optimistic, that do us favors, and that talk like we do. All the subtle stuff you never think about.

What most don't realize is that we are terrible at rating people trait by trait. We build one global impression out of how much we like someone and then apply it to everything else about them. Edward Thorndike proved this in 1920 watching military officers rate soldiers. If an officer liked a soldier, he also rated him high on intelligence and dependability, without knowing a thing about either. Thorndike called it the Halo Effect. Munger called his version the liking and loving tendency.

Two more studies should make you nervous.

In 1977 Nisbett and Wilson had students watch an instructor teach. The accent was the same, the mannerisms were the same, and the material was the same. The only difference was that one group watched him deliver it warmly and the other watched him deliver it cold. The warm group came away thinking he was pleasant and the cold group came away thinking he was irritating. Same actions, completely different judgment, and not one student could tell you why.

In 2000 Finucane, Alhakami, Slovic and Johnson found something worse. Risk and reward are supposed to be independent variables, meaning your read on one should tell you nothing about the other. In practice they move together. Like something and you will rate its benefits high and its risks low. Dislike it and you flip both. Then the researchers added time pressure and the whole effect got stronger.

Put simply, the less time you have to think, the more your brain leans on how it feels. This should scare you.

So what does this look like for you as an investor?

You inflate the odds because someone you like recommended it.

You wave off the risk because the CEO is warm and charismatic on the call.

You underrate a business because the CEO is cold and matter of fact, despite the results.

Not one of those feels like an error while you are making it, and that is the whole problem. You are not sitting there consciously deciding to ignore risk. Your brain is quietly doing it for you, on anything it likes, before you even notice.

We’re hardwired to form affectionate bonds, and our brains make all kinds of mistakes on the way there. This is why the best salespeople on Earth do this, and you won’t even notice it. They’ve harnessed mastery level skills in the field of liking.

This isn’t a call to be skeptical of every likable person. It’s a warning to your future self and your future returns. Because when you like something, or someone, the evidence has to hit a higher bar.

Think for yourself, especially the next time you find yourself liking the person giving you advice.

Due diligence over feelings,

BID