Who is responsible for YOUR Wrong decisions?
Blockbuster, a US-based movie and video game rental services provider had only one store left by end of 2018 in the United States & globally as well. This was not the case, always. In 2004, Blockbuster was a multinational employing 84300 people worldwide, having 9094 stores (just 14 years earlier) across 15 countries.
What everyone knows –
In 2000, Netflix’s founders Reed Hastings & Marc Randolph flew down to Dallas to meet Blockbuster’s global CEO John Antioco and offered him to buy out Netflix for a pittance — 50 million USD. The transaction didn’t materialize and the board of Blockbuster laughed Reed & Marc out from their headquarters, as John & board thought Netflix being a very small niche business.
By 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 revenues from the late fee charged from the customers, which customers despised (hated from the CORE).
John Antioco by 2005 -06, realized his mistake of not accepting the offer of Netflix and pushed the company to remove the policy of late fee. Also, he went ahead with DVD on demand waging a war on Netflix. This meant short-term revenue shrinkage for Blockbuster.
Immediate outcome — Board ousted John Antioco and brought new CEO. Board relied heavily on its initial thought & initial information that penalizing errant customers is the single biggest way of being heavily profitable.
Even John Antioco was suffering from Anchoring Effect. In 1998, DVD was replacing VHS Cassettes, Warner Brothers offered, 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 enter.
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 & 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 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, second-hand car dealers, they 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 you are just reading the note, “I will wait and try to get a better price”.
In reality, you will haggle for another 5000 INR and give away your car.
Your mind was already anchored when 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 you held it for 6 months. Luckily it went up by 22%. You were worried if it has run up too fast. You start considering booking profits. You cut your position and make money. Excited with your recent success you deploy your principal & gains in another stock- Stock B which has been dropping. It’s nearing a yearly low and you believe how much further can it fall and get in the trap of Value buying.
A few months later, 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 which you have bought continues to fall and you continue holding hoping to make 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 FIRST PIECE of Information which may or may not be even relevant in making decisions.
People often forget that ultimately the reason why the stock should continue to move up is on account of its Earnings Per share which is a Well managed Quality business that should only increase consistently.
It happens in life as well –
When you are being appraised in your work life by your superior or you are being appraised by your teacher in your 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 create a mental boundary around their words. It’s natural as you believe in their wisdom & 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 the great recession, Microsoft offered Yahoo 44.6 billion USD in cash & 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 of Microsoft. Microsoft mentioned it’s 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 much clear understanding of Alternatives & Probable potential Choices.”
