Who is responsible for your wrong decisions?

pixabay

By

Siddhartha Rastogi

Blockbuster, a US based movie and video game rental services provider had only one store left by the end of 2018 in the United States and globally. This was not always the case however. In 2004, Blockbuster was a multinational employing 84,300 people worldwide, having 9,094 stores (just 14 years earlier) across 15 countries.

What everyone knows

In 2000, Netflix’s founders Reed Hastings and Marc Randolph flew down to Dallas to meet Blockbuster’s global CEO John Antioco and offered him the opportunity to buy out Netflix for a pittance – 50 million USD. The Transaction didn’t materialize and the board of Blockbuster laughed Reed and Marc out of their headquarters, as John and the board thought of Netflix as a very small niche business.

By the end of 2010, Blockbuster filed for bankruptcy, with its valuation of 24 million USD, whilst Netflix in 2010 was valued at 13 billion USD and is currently valued at ~ 164 billion USD.

What most people are not aware of

Blockbuster received a large part of its revenue from the late fees charged from the customers, which customers despised (hated from the CORE).

John Antioco by 2005-6, realized his mistake of not accepting the offer of Netflix and pushed the company to remove the policy of late fees. He also went ahead with DVDs on demand waging a war on Netflix. This meant short term revenue shrinkage for Blockbuster.

The immediate outcome -was that the board ousted John Antioco and brought in a new CEO. The board relied heavily on its initial thought and information that penalizing errant customers was the single biggest way of being heavily profitable.

Even John Antioco was suffering from an Anchoring Effect. In 1998, DVDs were replacing VHS Cassettes, Warner Brothers offered a rent sharing of 40% on all new movie releases as it was the deal earlier with VHS Cassettes with Blockbuster. Blockbuster declined the offer. Eventually Walmart grabbed the deal and contributed the largest source of revenue for Warner Bros in years to come. John remained stuck with his idea of a better deal than the existing 40%, opening the way for competition to come in.

What is this Anchoring Effect?

Anchoring is a cognitive bias where an individual relies too heavily on an initial piece of information offered (considered to be the “anchor”) when making decisions.

An example from your day to day life

You want to sell your car. You go on google and check for the price of the second hand car with the make, year and city registration code. You get a price of INR 7,00,000 /= But you have bought the car for INR 20,00,000 /=. You had additionally spent INR 4,00,000 /= on a car sound system, seat covers, antirust coating, etc. You start hunting for a buyer and put the rate as INR 10,00,000 on various sites. No one bothers calling you. You speak to some car agents and second hand car dealers who all tell you a rate which is closer to INR 5,50,000. You try explaining the money spent on accessories but no one pays heed to your argument and finally you go online and change the price to INR 7,25,000.

No one bids for a week and suddenly one man calls and wishes to inspect the car. He visits you and likes the car and offers you a cash down payment of INR 6,00,000/=

What will you do?

Your answer will be, since you are not currently present in that situation and are just reading the note, “I will wait and try to get a better price.”

In reality, you will haggle for another 5,000 INR and give away your car.

Your mind was already anchored when the car dealers gave quotes of approximately 5,50,000 INR.

Does this happen with your investments as well?

You have bought a common stock of company A and held it for 6 months. Luckily it went up by 22%. You were worried if it had run up too fast. You start considering booking profits. You cut your position and make money. Excited with your recent success you deploy you principal and gains in another stock – Stock B which has been dropping. It’s nearing yearly low and you believe how much further can it fall and get in the trap of value buying.

A few months later, the stock A which you had sold earlier is up by another 30% and you curse yourself and stay away from it, whilst the stock B you bought continues to fall and you continue holding hoping to making money someday. Since you have anchored the price of Stock A and have sold it in profit, you will never buy that stock again at a higher price. In your mind Stock A will always remain expensive whilst you are ready to add more money in stock B as it has fallen far below your price.

In no way I am saying that Stock A is better or worse than Stock B. What I am trying to explain is that, more often our decisions are based on the FIRST PIECE of Information which may or may not even be relevant in making decisions.

People often forget that ultimately the reason why stock should continue to move up is on account of its Earnings Per share which is a Well Managed Quality business which should only increase consistently.

It happens in life as well

When you are being appraised in your work life by your superior or are being appraised by your teacher in school, you are being told what have you not done right and how could you have done it better.

Listening to those thoughts and ideas you create a mental boundary around their words. It’s natural as you believe in their wisdom and most importantly fear the outcome of non adherence. Practicing adherence, you get habitual for seeking approval and that becomes your anchor. You curb all possibilities of self-improvement and self-direction. You merely end up becoming a tool for someone else to achieve someone else’s desires.

The famous Yahoo story

In 2008, the year of great recession, Microsoft offered Yahoo 44.6 billion USD in cash and stock in a friendly takeover bid. Jerry Yang confounder of Yahoo declined the offer as he thought more can be extracted from Steve Ballmer, CEO Microsoft. Microsoft stated it was a friendly gesture and an amicable takeover and things can work for both organizations. Since the number of USD 44.6 bn was out, Yang from Yahoo anchored on that number and kept pestering for a mere 10.50% more. The deal fell through.

Finally in 2017, Yahoo was bought over by Verizon Communication for 5 billion USD, almost 10% of the initial offer.

Thus Siddhartha Rastogi says, “For curbing Anchoring Bias, first acknowledge that you are a victim of it, then research the decision in consideration with a deep understanding of Why and What. Doing this simply will help you get a much clearer understanding of Alternatives and Probable Potential Choices.”

Siddhartha Rastogi

Siddhartha was born to a learned middle class educated family in Semi Urban India. His father was an extremely honest man who because of his honesty had to pay the price in corporate world. Mother is a determined woman who ensured that children are being well taken care off. After a few years of birth, doctors called Siddhartha, a slow child having flat foot. He would fall more than he could walk. Determined mother ensured all therapies for her son to come out strong to fight the world. Siddhartha joined swimming when he was in 6th standard. Seeing other children of his class, he jumped in 10 feet deep pool and learnt swimming on his own, the very same day.

From that day there was no looking back. He topped his city in 12th and went to score highest in his B school exams. During his profession as banker, he became youngest branch manager of a MNC bank managing their biggest wealth branch in the country. There he found love of his life and got married. His love of his life emerged in the form of his daughter who completely changed him for good.

Siddhartha Rastogi is Director for a boutique Investment bank in India.

Siddhartha is a forward looking thinker & writer who has written a book on decision making. 8 Simple steps to effective decision making.

He writes on various social and current issues via his blog and can also be found on twitter.