Obviously greed is a reason. Greed is associated with reward superresponse tendency which is a mental model from psychology. In this case, its the greed of the broker, induced by huge commissions, which drives his behaviour, and its the greed of the customer, whose desire to get rich quick, contributes to his mental malfunction.
But is greed the only reason which produced this outcome, or is there something else?
There has to be something else, isn’t it? Lollapalooza outcomes are never due to only one reason. It’s a combination of many mental models, all working in the same direction, which produce lollapalooza outcomes.
So which models combined to produce this lollapalooza outcome?
The above story was taken from the film Boiler Room, an awesome movie which I screened in my class recently to students who had earlier read Mr. Munger’s talks on psychology. Members of the audience enjoyed the film, I think, because they could easily relate the Munger mental models from the talks to the scenes in the film.
My favorite scene is a lollapalooza. In this scene, Seth (played by Giovanni Ribisi) is a broker dealer working for a boiler room operation under the name of J.T Marlin Associates. Seth and his mentor, Chris (played by Vin Diesel) talk to Dr. Jacobs (played by Peter Maloney) on the phone, and by the end of the conversation, which lasts just a few memorable minutes, they basically get him to foolishly hand over his hard-earned money to them.
How did Seth and Chris do it? I think it’s very interesting to see how the pair used several mental models from psychology in combination to achieve the desired outcome - for them, not for Dr. Jacobs (boiler room operations are zero-sum games, which, incidentally, is also a mental model with enormous applicability – more about that one in a future blog post.)
An excellent way to identify the mental models embedded in the scene is to read its script, which I am reproducing below, while having the Munger Mental Model Checklist from psychology in front of you.
This is the procedure I followed, and was amused, though not surprised, to find the presence of multiple models in Munger's checklist in that memorable scene.
Read the script of the scene below along with my comments[IN CAPITALISED BOLD LETTERS IN BRACKETS] and I think you'll arrive at the same conclusion as mine.
INT. BOILER ROOM - DAY
SETH (O.S.)
I'm sorry, sir, I didn't realize...
DR. JACOBS
I'm really busy, Seth.
Seth looks over towards Michael's office and sees Greg and three other team leaders coming out.
SETH
I understand. I'm real busy here myself, Doctor. Look, we're going to come back to you in a month with one idea and one idea only. If you like what we have to say, great, we'll do business. Worst case scenario you'll hear yourself a new business idea. Chat about it with your golfing buddies and we'll part as friends. That's fair, right? [ONE IDEA AND ONE IDEA ONLY - SETH INVOKES THE SCARCITY MODEL HERE]
A nurse is asking the Doctor a question and he loses focus.
DR. JACOBS
Ummm what?
SETH
Great. So tell me, Doc, are you working with a million dollars in the market right now?
DR. JACOBS
Who is this again?
SETH
Tell me something, you're a doctor. Have you ever heard of a drug called Fenamul? It's being manufactured by MSC pharmaceuticals. [INFLUENCE FROM MERE-ASSOCIATION TENDENCY I.E. ASSOCIATION OF DRUG WITH DOCTOR]
DR. JACOBS
No.
SETH
Well it's in the third stage of FDA approval right now. Word is, it's going to get approved in the next three months. Could be tomorrow for all I know. Anyway, I'm getting ahead of
myself. And you're real busy over there. Why don't I send you out the info you requested about the firm and a senior broker will call you next month with that one idea. [AUTHORITY MISINFLUENCE TENDENCY - FDA AS AUTHORITY HERE. ALSO SCARCITY - SCARCE, VALUABLE INSIDE INFORMATION PRESENTED EXCLUSIVELY]
DR. JACOBS
Wait, wait, wait, hold on a second, forget the info, let's talk about this now. What was the name of the drug again? [DEPRIVAL SUPERREACTION TENDENCY - DR JACOBS REACTS TO THE POTENTIAL LOSS OF AN OPPORTUNITY BY DISPENSING WITH THE NEED TO BE DILIGENT]
Seth begins to smile.
SETH
You know what, sir, let me pass you on to a senior broker who's more involved with this particular stock. Hold on a second. [AUTHORITY MISINFLUENCE TENDENCY - SENIOR BROKER AS AN AUTHORITY FIGURE WHO IS SUPPOSED TO KNOW MORE, HE WILL NOT SAY ANYTHING INCONSISTENT WITH WHAT THE JUNIOR BROKER SAID - THE WHOLE THING IS PART OF THE ELABORATE GAME DESIGNED TO GAIN THE CUSTOMER'S CONFIDENCE]
Seth pushes the hold button. He pauses and then YELLS:
Reco!!
Everything and everyone in the room stops. There is a slight
pause and then CHAOS. About 20 brokers BOLT toward Seth.
Chris is closest. Another broker JUMPS onto the table separating him from Seth and clambers over it. Chris puts on the steam and gets there first. The other broker runs straight into Seth, unable to stop.
Chris regains his composure wiping the smile off his face.
CHRIS
Card.
SETH
Okay, his name's Dr. Jacobs and from the sound of it, I'd say he's
definitely...
CHRIS
Whoa, whoa, I don't wanna hear it, kid.
Chris grabs the card from his hand and looks at it briefly.
CHRIS (CONT'D)
Hi, Dr. Jacobs, this is Chris Marlin over at JT Marlin.
DR. JACOBS
Marlin?
CHRIS
Right. He's my father.
Another broker connects a wire to a jack on the back of the phone and the conversation is now heard on the PA system.
CHRIS (CONT'D)
So my associate tells me you're interested in one of our stocks.
DR. JACOBS
Yes, MSC sounds like it might be interesting.
CHRIS
Might be? Might be doesn't sell stock at the rate MSC is going, Dr. Jacobs. We're talking about very high volume here. [SOCIAL PROOF TENDENCY - VERY HIGH VOLUME IMPLIES THAT THERE ARE MANY OTHERS WHO APPROVE OF THE IDEA WHICH AUTOMATICALLY MUST MEAN THAT IT'S A GOOD IDEA]
DR. JACOBS
Well, I still have to run it by my people.
CHRIS
That's great, Doc. If you want to miss yet another opportunity here and go watch your colleagues get rich doing clinical trials, then don't buy a share and hang up the phone. [DEPRIVAL SUPERREACTION TENDENCY, AND ENVY/JEALOUSY TENDENCY INVOKED TOGETHER IN JUST TWO SENTENCES RESULT IN TOTAL SUPRESSSION OF THE DESIRE TO QUESTION ANYTHING]
DR. JACOBS
Well hold on a second. I didn't say that. I just wanted to talk more about it.
CHRIS
Honestly Doc, I don't have the time. This stock is blowing up right now. The whole firm is going nuts. Let me open the door to my office.
Chris holds the phone up to the 100 brokers standing there silently. They begin talking loudly and screaming "Buy, Sell". Chris makes a hand motion and they stop.
You hear that? That's my trading floor, Doc. Now I have a million calls to make to other doctors who are already in the know. I can't walk you through this right now. I'm sorry.
Huge pause. Everyone looks on waiting to hear what he'll do. Chris doesn't even look mildly concerned. Then... [DEPRIVAL SUPERREACTION TENDENCY I.E. TIME IS RUNNING OUT DR JACOBS + SOCIAL PROOF TENDENCY I.E. JUST HEAR HOW PEOPLE ARE NUTS OVER THIS STOCK + ENVY I.E. OTHER DOCTORS ARE GOING TO GET RICHER = BUY NOW! IT HAS TO WORK NOW ISN'T IT?]
DR. JACOBS
Okay, okay. Let's do this. [MISSION ACCOMPLISHED! - THEY GOT HIM - HOOK, LINE, AND SINKER]
CHRIS
Now, since you're a new account I cannot go any higher than two thousand shares. I'd love to but I just can't do it. [AVAILABILITY MISINFLUENCE TENDENCY - CHRIS VERY CLEVERLY NOW MENTIONS A FIGURE OF 2,000 SHARES WHICH IS PROBABLY MORE THAN WHAT DR. JACOBS WOULD HAVE BOUGHT - HE CREATES AN AVAILABLE ANCHOR IN THE MIND OF DR. JACOBS - ANCHORING BIAS AS A SPECIAL CASE OF AVAILABILITY BIAS COMBINES WITH DEPRIVAL SUPERREACATION TENDENCY]
DR. JACOBS
Two thousand?! Whoa! That's way more than I was thinking about. Two
thousand, Jesus. (pause)
I'm just curious, why can't you sell me more than that? [THE STRATEGY IS WORKING! DEPRIVAL SUPER-REACTION TENDENCY COMBINES WITH REWARD SUPERRESPONSE TENDENCY TO MAKE DR. JACOBS TO WANT MORE SHARES!]
The brokers hold in their laughter.
CHRIS
Well, we like to establish a relationship with our clients on something small before we get to the more serious trades. Let me show you several percentage points on this small trade and then we'll talk about doing future business.
DR. JACOBS
That sounds good. Give me two thousand shares.
CHRIS
Done.
DR. JACOBS
You sure you can't do any better on this one?
CHRIS
No, I'm sorry, Dr. Jacobs.
DR. JACOBS
Alright, let's start with this trade then.
CHRIS
Great. I promise we'll go big on the next one.
Now do you want the confirmation sent to your office or your mansion?
DR. JACOBS
(laughs)
Very funny, Mr. Marlin.
CHRIS
Alright, let me put my secretary on. She'll take your info.
Chris hits the hold button and then...
CHRIS (CONT'D)
Done and done.
The entire firm applauds when he gets off the phone. The crowd disperses. Chris sits down on Seth's desk.
CHRIS (CONT'D)
I love doctors, man. All that money and not a clue what to do with it. Fucking rollovers. Hold onto your ankles, Doc, here comes the love.
SETH
Why'd you put a max on his buy?
CHRIS
Didn't you tell him how it works?
GREG
He's still a trainee. He doesn't need to know about initial sell limits.
CHRIS
Right, right. Make sure he shows you the ropes. He's too busy calling his bookie. You fucking Hebrews, man. Always looking out for yourselves, never the trainees.
GREG
That's great. Why don't you go back to little Italy now?
Greg points across the room.
CHRIS
Why don't you go make a latke dreidel boy.
(back to Seth)
The reason I capped him is in case he's a piker. See, we're going to go ahead and front the money for this sale. If he doesn't send the check, I'm the one holding the bag.
(whispers)
Last commission month a kid on Jim's team wrote a million dollar ticket.
Stock was down three and a half points by settlement. Fucking kid took a one quarter million dollar hit. Besides, first sale just whets the appetite. If he's a whale, which it looks like he
is, then I'll get him on a day when there's a real rip.
SETH
Rip?
CHRIS
(surprised)
Rip. Commission. That's why we work here. We get huge rips. [REWARD SUPERRESPONSE TENDENCY- INCENTIVES AS SUPERPOWERS - GIVEN SUFFICIENT INCENTIVES AND YOU CAN BE VIRTUALLY SURE THAT THE PRODUCT/SERVICE WILL GET PUSHED TO THE CUSTOMER, NO MATTER HOW TOXIC IT MAY BE ]
SETH
(quietly)
I actually still don't know how it works.
CHRIS
A two dollar rip, which is unheard of anywhere on Wall Street, means you're walking away with two dollars for every share you sell. Real money. Jesus Greg, you tell him where the bathroom is yet?
GREG
Seth, I showed you where Chris' desk is.
SETH
How does Michael afford that?
CHRIS
I don't know, but if he's doing it, he's making money on it. Point is, don't worry about selling small on the first trade. You service the client right and he'll be back for more. Bide your time. Show him a three percent return and he'll trust you to watch his kids for the weekend. If he's serviced correctly it's not a matter of whether he's making a second trade with you, it's a matter of how much.
Chris' secretary calls out from across the room.
CHRIS
Gotta bounce.
Seth stands there in awe. He sees the potential here.
