We all like to think that we make choices in an objective manner, but we are human after all, and the influences of others and our own biases affect how we make decisions. Reciprocity is a particularly interesting dynamic, especially given how business gets done in the investment world.
Cialdini’s principles
Robert Cialdini wrote Influence: The Psychology of Persuasion almost forty years ago. In it, he outlined the six principles that are used by influence businesses (reciprocation, liking, social proof, authority, scarcity, and consistency), subsequently adding a seventh — unity.
In his 2016 book, Pre-Suasion, he opened the section on reciprocation with this simple statement: “People say yes to those they owe.” Even modest gifts can create a subconscious social debt, which is why mailed solicitations from charities often include items that you can use, Costco and others offer free samples, and time-share companies allow you to enjoy a deeply-discounted stay before you hear the sales pitch.
Munger on misjudgment
Charlie Munger addressed reciprocation in his speech, “The Psychology of Human Misjudgment,” using “reciprocate-favor” to differentiate the kind of activity we’re focusing on here from its flip side, which involves retaliation:
Like other psychological tendencies, and also man’s ability to turn somersaults, reciprocate-favor tendency operates to a very considerable degree at a subconscious level. This helps make the tendency a strong force that can sometimes be used by some men to mislead others, which happens all the time.
Wise employers, therefore, try to oppose reciprocate-favor tendencies of employees engaged in purchasing. The simplest antidote works best: Don’t let them accept any favors from vendors. Sam Walton agreed with this idea of absolute prohibition. He wouldn’t let purchasing agents accept so much as a hot dog from a vendor.
Industry examples
As a participant in the investment world, you are on one or the other side of reciprocate-favor situations, depending on whether you are selling or buying products and services. Given that chains of agents are found throughout the business, you may very well be on both sides at different times. For example, an investment advisor may be the recipient of favors from a mutual fund company as well as the provider of favors to prospective clients.
An excellent exposition of the wooing that goes on in the industry can be found in Karen Ho’s book, Liquidated: An Ethnography of Wall Street. One section details the recruiting of potential investment bankers from Ivy League schools, which starts with the offering of pretty mundane items:
They hand out the best goodie bags, the most titillating magnet sets, mugs, Frisbees, water bottles, caps, and t-shirts, and in a matter of days, thousands of students become walking advertisements as their logos disperse into campus life.
As the process continues, there are gatherings with free food and drinks. Eventually, when the pool of candidates is winnowed down, there are nights at hotels in New York City, meals at fancy restaurants, and events to make them feel even more special than they already do.
Those that are selected may someday — after their grueling apprenticeships — be senior investment bankers themselves, practiced in the art of schmoozing and providing favors (along with doing the other parts of their jobs).
Jason Zweig wrote of the little gifts common in the industry in a 2012 holiday season piece, “The Big Corruption in Small Gifts”:
Giveaways, gifts, freebies, premiums, promos, tchotchkes, swag. Every year around this time, it pours in: the pens with corporate logos, the canisters of flavored popcorn, the iTunes gift cards, the boxes of chocolate, the pocket calendars, the shipments of fresh fruit.
No one is really affected by that stuff, right? On the contrary, the impact is greater than you might expect. The fund companies that stuff their booths at conferences with branded goodies wouldn’t spend “all that money on swag in the first place unless they thought it would sway the financial advisers who took it.” At a minimum, they are creating walking advertisements at those conferences (just like the investment bank recruiters do), and the artifacts find their way back to advisory firm offices as continual reminders.
Escalation
The bigger the pile of money at stake, the more things can get out of control in the favor-giving department. One place where that has happened is in dealings between large money managers and the brokers that seek to do (more and more) business with them.
The culture of those relationships has historically involved lots of entertaining, from expensive dinners to prime seats at concerts and sporting events. And golf at top courses, begging the question, “What consideration should be given to an institutional salesman’s firm when he takes you to Pine Valley for a couple of rounds each year?”
Over time, it’s easy for the offers to escalate (or, brazenly, for the asks to escalate). Not that you start with a large tin of Virginia peanuts at Christmas and then one day it’s private jets to Las Vegas with “hookers and blow,” but it has been known to get that out of hand.
Compliance
While there is guidance from regulators regarding gift-giving practices (for example, in the United States, from the SEC and FINRA), there is quite a bit of latitude in interpretation. Organizations need to formulate and enforce compliance rules on their own.
Therefore, gift-giving and gift-receiving expectations should be clear to all. And since owners, leaders, and star players in an organization are the ones most likely to offer or receive extravagant gifts and favors, it’s important that they be held accountable just like everyone else.
Favors are powerful and reciprocity is a foundational aspect of human interaction. Our decisions can be affected in ways that we don’t understand.
Published: February 7, 2023
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