To illustrate the behavioral roots of value investing, let us turn our attention to, of all places, the pineapple. As described in The School of Life’s, “Why We Hate Cheap Things” presentation, Christopher Columbus was the first European to taste the pineapple and he was immediately taken with its odd form and acidic sweetness. Columbus tried to transport some of these spiky treasures back to the Old World but they proved hard to ship, which made them exceedingly rare. Accordingly, in Columbus’ time a single pineapple cost roughly $5,000!
Rare and precious as they were, they began to be fetishized by royalty. Catherine the Great and Charles the Second were both noted pineapple boosters, but their enthusiasm was unrivaled by the Fourth Earl of Dunmore who had a temple constructed to honor the fruit. By the 19th century though, things were beginning to change. Large pineapple farms now existed on Hawaii and improvements in transportation technology now made it far easier to transport pineapples. As pineapples become more ubiquitous, they began to be ignored, and now sell for about $1.50. The pineapple, of course, is the same as it ever was, but our perception of its value and even quality are dramatically diminished by its decreased price. It seems unlikely that we savor our fruit salad today with a fraction of the intensity of say, a Catherine the Great
The story of the pineapple demonstrates the close link between price and perceived worth, an idea that was proven artfully by the work of a “horizontal wine tasting” conducted by Stanford Professor Baba Shiv. Shiv had participants lie on their backs in an fMRI machine and gave them carefully titrated doses of wine, each with an accompanying price tag. He then measured the brain activity of the participants as they sipped each of the wines, looking for a relationship between price and cerebral processing. Specifically, Shiv wanted to examine the part of the brain, the ventral medial prefrontal cortex, that we know codes for pleasure.
Sure enough, participants showed more activity in the pleasure centers of the brain when they thought they were drinking $90 wine versus $10 wine. The only problem was that it was all $10 wine! The participants were given the same wine in each condition, meaning the differences in pleasurable brain activity were attributable directly to perceived differences in price rather than the quality of the wine itself. All else being equal, we look to price as the foremost determinant of quality.
For much of our pre-industrial past conflating price and value made perfect sense. Artisans crafted goods by hand and the more care that was put into the creation, the better it tended to be. Today, in a period of automation and cheap access to natural resources, the relationship between cost and value is more tenuous than ever and in capital markets it can be accurately said to be inverse. The more you pay, the less you get. Behavioral investors must create processes that allow them to decouple the spurious mental correlation between price and value and think like a child. A child, who, knowing nothing of the price or provenance of a toy, sets it to the side to engage with the truly interesting part of the gift: the box.
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