by Key Points
- First impressions matter; whether we like it or not, they guide our behavior and impact our decisions.
- Furthermore, sometimes our initial judgements are incomplete or based upon a partial understanding of the facts.
- Primacy Bias is the notion that we often overemphasize initial events over longer-term averages when making decisions about uncertain future events.
The Great Debate
John F. Kennedy went to bed on the evening of September 25, 1960 as a relatively unknown senator from Massachusetts. By the end of the following day, he was a bona fide star. September 26 of that year marks a pivotal day in the history of the United States — it represents the nation’s very first nationally televised debate. And this debate was so impactful many believe it forever changed the fate the country.
“It’s now common knowledge that without the nation’s first televised debate…Kennedy would never have been president.”—Time
The story behind the debate is legend at this point. According to lore, Nixon looked pale and weak on television, having just undergone a recent hospitalization. However, Kennedy appeared cool, calm, and collected.
As the tale goes, those that listed on the radio thought that Nixon was the winner. However, those that watched on television concluded the opposite. Unfortunately for Nixon, most watched rather than listened. By 1960, around 88% of American households had televisions, and according to Broadcast Magazine (the predecessor of Nielsen), about 74 million viewers watched the debate on television.
“Many say Kennedy won the election that night.”—Time
There were later debates throughout the campaign, and many concede that Nixon did better on those, and he looked healthier too. But, according to Ted Sorensen (Kennedy’s speech writer) the damage had been done. Schroeder affirms, “You couldn’t wipe away the image people had seared in their brains from the first debate.” Clearly, first impressions matter.
Instinct Can Be Deceiving
In the last post of this series we discussed Recency Bias, which is the tendency to place a greater weighting on recent events when making decisions. There’s a sibling to this cognitive bias, known as Primacy Bias; however, this time, the tendency is to place a greater weighting on initial events when making decisions.
Mother always said it’s important to make a good first impression, and for very good reason — first impressions really do tend to stick. Incredibly, first impressions can even be more powerful than the actual truth, as supported by the research of Nicholas Rule from the University of Toronto (and perhaps also Kennedy’s election win).
“We judge books by their covers, and we can’t help but do it,” said Nicholas Rule, Ph.D., of the University of Toronto. “With effort, we can overcome this to some extent, but we are continually tasked with needing to correct ourselves.”—PsychCentral
To study this phenomenon, Rule investigated how individuals categorize faces between trustworthy and not trustworthy. Based upon the results of Rule’s study, it turns out that facial appearance was a stronger predictor of whether a given face is viewed as being trustworthy as compared to an actual description provided with the face, even if the description conflicted with the face itself.
For example, according to Rule’s findings, an untrustworthy face with a trustworthy description still led to the impression of the face as being untrustworthy. And similarly, a trustworthy face with an untrustworthy description still led to the impression of the face as being trustworthy.
Rule asserts, “the less time we have to make our judgments, the more likely we are to go with our gut, even over fact”. Furthermore, “As soon as one sees another person, an impression is formed,” Rule said. “This happens so quickly — just a small fraction of a second — that what we see can sometimes dominate what we know.”
That First Hit
When it comes to investing, Primacy Bias can lead individuals to chase returns in a manner that ultimately can be self-destructive. Let’s use another casino analogy as an example. (Note: if you haven’t guessed by now, the simple rule is that the house always wins.) Nevertheless, here is just another way of how this seemingly inevitable conclusion plays out.
Let’s say on your very first trip to a casino, you win big at blackjack. Given this, you make more trips (of course). In the end, you end up chasing easy money far into the future, with little regard to how much your losses keep adding up. The premise here is that you were so strongly rewarded by your initial experience with gambling that future losses down the road are either ignored or downplayed considerably.
When it comes to active investing, most investors can point to an early win that they might highlight to others and themselves as proof of their investment prowess. But over time, as we have discussed (and just as with a casino), the more you play, the greater your chances of underperforming expectations.
However, not everyone has a great initial experience with investing when just getting started. Some lose fantastically early on and decide to never place another trade or take another risk in the markets. Unfortunately, Primacy Bias from this side of the fence can be just as detrimental (if not more) to one’s long-term financial well-being. As such, in the next post of this series, we’ll explore this particular concern in more detail.