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Monday, 13 May 2013

The Cherry Coke Effect?

Hunger Games

If you want a favorable decision from a judge pray that you get a hearing early in the day or straight after lunch.  In similar fashion you shouldn’t be making investment decisions on an empty stomach.  In the parlance, such arbiters of justice and seekers after profit are suffering from ego depletion; although we might perhaps just say that they’re hungry.

Anyway, ego depletion seems to have a real effect on our ability to make important decisions: we’re more likely to be decoyed, to procrastinate and to compromise over our decisions when we’re low in energy.  So this explains why Warren Buffett is such a good investor; it must be down to his addiction to Cherry Coke. Surely?

Ego Depletion

David McRaney has produced a great summary of the history of ego depletion on his website, You Are Not So Smart.  As he relates, the research studies of Roy Baumeister and colleagues (see, for example: Ego Depletion: Is the Active Self a Limited Resource?, no guesses to the answer) revealed that there seems to be a psychic cost associated with self-denial and self-control: we have limited reservoirs of the stuff and the harder we have to work to resist temptation the more these reserves are depleted:
“These results point to a potentially serious constraint on the human capacity for control (including self-control) and deliberate decision making. “
The weird thing about this is that it isn’t some special state that we get ourselves into, it’s simply what happens in everyday life.  Force yourself to concentrate on some mind-numbingly boring task, like everyday work, and you’ll find it harder to resist the call of the candy bar.  And it may well be that it’s the candy bar that’s crucial to managing to continue to self-regulate.

Parole Lottery

As McRaney notes, in Extraneous Factors in Judicial Decisions the researchers, Shai Danziger, Jonathan Levav and Liora Avnaim-Pesso showed that the percentage of favourable rulings during a parole session drops from 65% to virtually zero as sessions proceed.  Following a break for food the positive decision rate jumps back to 65%:
“We have presented evidence suggesting that when judges make repeated rulings, they show an increased tendency to rule in favor of the status quo. This tendency can be overcome by taking a break to eat a meal, consistent with previous research demonstrating the effects of a short rest, positive mood, and glucose on mental resource replenishment”
In fact, any kind of positive reinforcement seems to reduce issues with depletion of cognitive resources, but low glucose levels is one area where researchers are focussing their attention, as higher brain functions seem to require a lot of fuelling.  In deference to this, recent research by Michael Kuhn, Peter Kuhn and Marie Claire Villeval  has examined how our ability to defer income is affected by cognitive load.  As you might expect, if participants were fed glucose drinks they were able to control their propensity to spend more effectively.

On the other hand, it turned out that if they were given a sugar free drink they were also able to defer their spending, which rather knocks the idea that glucose is a key factor in ego depletion.  In fact it rather looks like this is indicating that the reward mechanism of the dopamine system is cutting in to boost the individuals’ egos and replenish their reserves of "won’t" power (see: Curiouser and Curiouser: Incentives Through The Looking Glass). To confuse even more, people who had undertaken complex prior tasks also were able to show better self-control, which the researchers put down to an “attention/focussing” effect, essentially a priming mechanism for the complex stuff that lay ahead (see: To Boldly Go: Risk and the Prime Directive).  

Which sort of indicates how hard these experiments are to get right, although not how difficult it is to construct elaborate explanations for why they go wrong.

Depleting Fast and Slow

Another rich area of psychological explanation for this type of behavior arises out of the separation between so-called System 1 and System 2 choice mechanisms.  Anyone who’s read Daniel Kahneman’s Thinking Fast and Slow will be familiar with the concept – System 1 (Fast) handles intuitive thinking while System 2 (Slow) handles deliberative thinking.  System 2 is better for those tricky situations that need careful consideration but we’re not always too good at recognising this and often misapply System 1 where System 2 would be better used.  In investment we’re rarely better off using System 1.

In Deciding Without Resources  the researchers looked at the impact of resource depletion on our propensity to use System 1 over System 2, even in situations where the latter would produce better results.  As you might expect from the foregoing discussion:
“Specifically, we demonstrate that resource depletion enhances the role of intuitive System 1 influences by impairing the effortful and deliberate overriding role of System 2.”
Anastasiya Pocheptsova, On Amir, Ravi Dhar and Roy F. Baumeister’s results are particularly interesting because they identify a number of specific effects of this type of resource depletion:
“We find that resource depletion increases the share of reference-dependent choices, decreases the compromise effect, magnifies the attraction effect, and increases choice deferral”
So let’s unpick this.  Reference-dependent choices are relative to specific reference points – anchors – and trigger our loss aversion anxieties (see: Anchoring: The Mother of Behavioral Biases).  While investment decisions should be made solely on the basis of the current valuation we all too often rely on other factors.  The attraction effect issue is the one we looked at in Birds, Bees and the Decoy Effect – the inclusion of extraneous options can influence our choices.  Being depleted makes us more likely to suffer from this problem.  Choice deferral is simply a grand way of referring to procrastination – and resource depletion makes us more likely to avoid making a decision and carrying on looking (see: Retirees, Procrastinate at Your Peril).

Mashed-up Behavior

This is a right old mash-up of behavioral finance, spanning a whole range of different factors.  And there’s more.  We’ve previously looked at the idea of mindfulness as a mechanism for preventing us making stupid financial decisions (see: Mindfulness), but constant mindfulness itself would potentially lead to cognitive depletion, making us more likely to make bad decisions.  Well, there’s not a great deal of research on the topic but in Mindfulness Meditation Counteracts Self-Control Depletion  the researchers Malte Friese, Claude Messner and Yves Schaffner find that … well, you can probably figure that out for yourselves.

In general we’d expect most intelligent investment decisions to be made by people exercising System 2, yet we know that paying constant attention is likely to deplete our cognitive resources.  If a spot of meditation or a quick swig of Cherry Coke helps us make better decisions then so be it.  After all, it should be our money at stake, not our egos.


  1. Hi, I miss your posts. Hope everything is OK with my favourite blogger :)

  2. HI - Thanks for the post. I love this bit of research. Whenever I show this to my clients (I Coach Traders), there always seems to be a slight 'Aha!' moment for them as the realisation of the consequences of this hits home.

    I myself had a significant Aha moment with this. Many years ago in my younger trading career I was active intraday, traidng rate futures. In the moring I would trade Deutschemark futures and in the afternoon USD futures. In the morning I tended to make money, in the afternoon my trading tended to suck. - I just thought I was a shockingly bad USD trader. However , later when I became more longer-term and I traded a lot less, this pattern dissappeared. I.e. I became a better USD trader relative to DEM or EUROS as they had become. Having read this research I actually think this was more than likely what was happening.

    This research is not just about decisions, its about will-power. self-control and the ability to be objective. As the day continues, and as each period post- Food/sugar intake continues, our ability to be objective declines, and our susceptibility to poor decisions/sub-optimal default behaviours and behaviour biases increases.

  3. Love your blog! I have only stumbled upon it today but have spent around 20 minutes surfing it. I love the way you write and its thought inducing manner. Good work!

  4. There is an inference from the research on judges that they make better decisions after being fed and watered, when actually they are more benign to the defendants. This, to me, simply suggests that on an empty stomach they are merely more risk adverse.

    I'm not therefore convinced that you can read across that better investment decisions are made by drinking cherry coke.

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