One of the foundation stones of behavioural economics is the recognition the human brain is hardwired not always to act in investors’ best interests.
Sometimes the instinctive mistakes that result are quite complex – for example, the ‘narrative fallacy’ underpinning people’s fondness for stories, which we have discussed in pieces such as No place for ‘Once upon a time’. And sometimes they are rather less so.
The 'third pounder'
Take the curious story of the ‘Third Pounder’ burger, which we recently came across while reading Against Empathy: The Case for Rational Compassion by Paul Bloom.
Since it was launched in 1971, the McDonald’s Quarter Pounder has taken its place in the pantheon of fast food staples – and, while it has had to see off a lot of competition along the way, human nature has apparently helped.
In the early 1980s, as Bloom recounts, a US fast-food restaurant chain called A&W launched its ‘Third Pounder’ burger.
This was not only generally rated more highly in taste tests than the Quarter Pounder but, being the same price, it was clearly also better value as it contained more beef. At least … we say ‘clearly’ but the US burger-buying public seemed curiously unconvinced.
A&W was so perplexed as to why nobody was interested in its better-tasting, better-value burger that it ran extensive market research.
Initially, it was reluctant to accept the principal explanation that kept surfacing from its surveys and focus groups but eventually the weight of evidence grew so strong there was no escaping one simple conclusion – people kept getting their fractions wrong.
3 is smaller than 4
Yes, the reason A&W’s Third Pounder failed – and why no other chain, including McDonald’s, has made it work either – is apparently because, as three is less than four, many people see a Third Pounder as smaller than a Quarter Pounder.
Typically this provoked the response: “Why should we pay the same for a third of a pound of meat as we do for a quarter of a pound of meat in McDonald’s? You are overcharging us.”
And since the customer is always right – even when they are arithmetically wrong – the Quarter Pounder, with or without cheese, reigns supreme.
Back in the world of investment, meanwhile, the story stands as yet further evidence that, whenever you are mixing people and money, it is important the human element follow a set and repeatable process and have other humans around to sense-check their conclusions.