Rosé-tinted glasses - Why even experts can be blinded to reality by context and experience
Do you have a friend for whom the sniffing, gurgling and describing of wine seems more of a pleasure – or performance – than the drinking of it? If so, our latest foray into the world of behavioural finance may offer some comfort next time you share a bottle. If on the other hand you are that friend, you may wish to pour yourself a glass of something sophisticated yet unpretentious before reading further.
In 1998, Frederick Brochet, a cognitive neuroscience researcher at the University of Bordeaux – and, it should be added, a serious oenophile – invited 54 wine specialists to a tasting. He served them a glass of white and a glass of red and then a second round of white and red, both times asking the experts to write down their impressions.
Their descriptions were straight out of the wine-taster’s thesaurus – ‘plump’, ‘deep’, ‘dark’, ‘blackcurrant’, ‘cherry’, ‘fruit’, ‘raspberry’ and ‘spice’ for the glasses of red; ‘golden’, ‘floral’, ‘pale’, ‘dry’, ‘apricot’, ‘lemon’, ‘honey’, ‘straw’ and ‘lively’ for the two whites – which would be unremarkable were it not for the fact the second pair of wines were identical in every way but one.
All Brochet had done was to add some flavourless food colouring to the white to create the fake red – and not a single person among the 54 experts suggested the two wines tasted the same or even similar, let alone that the ‘red’ might actually be white. Brochet went on to do a second experiment with similar results and yet, despite how it might look, his intention was not to show up wine connoisseurs.
Instead, he argued, his experiments demonstrated “the power of perceptive expectation” and that: “The subject perceives, in reality, what he or she has pre-perceived and finds it difficult to back away.” What this means, according to Alex Boese’s Elephants on Acid, where we learned about Brochet’s work, is that the brain does not treat taste as a discrete sensation.
“Instead, it constructs the experience of flavour by taking into consideration information from all the senses,” the book continues. Indeed, according to Brochet, the brain places almost 20 times more emphasis on sight than on any other sense, which may go some way to explaining why almost all wine fraud is exposed by paperwork irregularities rather than punters complaining their wine tastes horrid.
If this all reminds you of something, it could be the ‘Pepsi Challenge’ marketing campaign and indeed Elephants on Acid tells of some rather more scientifically controlled, pharmaceutical industry-standard cola-based tests undertaken by researchers in 2005. These not only found tasters unable to distinguish between Pepsi and Coca Cola but also that Coke apparently tastes better when it is labelled as Coke.
Glossing swiftly over the slightly sinister implication that Coca Cola’s marketing department has, over the years, managed to rewire people’s brains so successfully that two near-identical fizzy drinks taste differently, these two sets of experiments are yet further evidence the context in which you experience something has a big impact on how you perceive it and what you believe about it.
Putting that into an investment context, as you always knew we would, it helps explain why even experts can be put off otherwise attractive businesses by poor reputations that are no longer objectively merited – UK banks being only one example.
The sheer quantity and noise of negative sentiment towards the sector can have a distorting impact on investors’ judgement of how risky banks are, no matter how objective they might strive to be. It is yet another reason why, here on The Value Perspective, we prefer to stick to a value investment strategy that – even if it will never completely succeed – at least helps to remove such behavioural biases from our own deliberations.
Incidentally, the behavioural science term for when people’s likes, desires and other emotions influence what they believe or how they think about the world is the ‘affect heuristic’ and the example we give in our Glossary, which you may or may not find to your taste in the midst of Euro 2016, is “football fans betting on England winning a major tournament regardless of the actual odds”.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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