Behavioural Finance – 100 seconds to understand the link between brownies and investing
In just a few weeks we’ll reach the 100 day mark of 2025. We see this round number in a variety of contexts: the first 100 days of a politician's term of office; centenarians — people who have reached the ripe old age of 100; 100% as the most ambitious or austere of targets; and financial indices that are often rounded up to 100. In this article we look at numbers and quantities surrounding a cognitive preference known as “unit bias”.
Will that be one brownie or two?
Numbers and amounts are just as present and influential in finance as they are in our decision-making process. In two earlier articles we addressed the issue of having too many choices when faced with countless options (The brain caught in a jam jar – the harmful effects of too many choices) as well as the anchoring bias (Behavioural finance — when numbers count: 12/31/23 = 123 123!).
Up until fairly recently, most research in food services focused on how the size of plates and glasses influences the portions consumed at a buffet, and on the impact of utensil size in salad bars.
The researchers of the study summarised below1 looked at portion size instead. At a communication conference hosted by the Royal Library of Copenhagen in Denmark , they analysed the delegates' consumption of brownies and apples during the coffee breaks. The goal was to ascertain whether the portion size of the brownies, cut in half on the second day of the conference, and the apples, served in smaller portions, influenced the delegates’ food choices. The “recipe” worked: the delegates increased the average proportion of apples consumed per person by 60.8% and reduced that of the brownies by 34.8%.
Setting aside the fact that apple slices are a more convenient (pragmatic bias) choice of snack than a whole apple while networking, the above studies on utensil, plate and portion size all point to unit bias — the natural tendency to perceive a proposed quantity as normal and therefore acceptable. This was the case with the brownies in the previous example.
Another experiment conducted in 2011 illustrates the impact of numbers2. In the first scenario, standard posters were used to advertise either watches or computers for sale. In the second scenario, the posters specified that stocks were limited to a total of 100 items for the entire period of sale. This detail created a perception of scarcity and more than doubled consumers’ purchase intentions.
1 Apples versus brownies: A field experiment in rearranging conference snacking buffets to reduce short-term energy intake, Hansen, P. G., Skov, L. R., Jespersen, A. M., Skov, K. L., & Schmidt, K. (2016). Journal of Foodservice Business Research, 19(1), 122-130.
2 Scarcity messages: A consumer competition perspective, Journal of Advertising, P. Aggarwal, S.Y. Jun, H.H. Huh, 2011
Asset allocation: change your perception
When it comes to investment, the information regarding the maximum amount you may place in a solution, as well as the fees by invested amount, should not influence the amount you have in mind. Unfortunately, unit bias makes us inclined to believe that:
If we can't invest more than a given amount or proportion of our assets (for example, a set amount or a proportion of our wealth for regulatory or diversification reasons), we should invest the maximum amount. But this may not the best choice for the situation at hand;
If the fees (management, brokerage, etc.) become lower beyond a certain amount, we should invest at least that amount. But this does not make sense other than from a pricing perspective.
There is no “one-size-fits-all” allocation and the right allocation is not determined by optimising predefined portions.
Unit bias also affects value perception: we might prefer holding a whole asset (or a multiple of its units) over a fraction of a comparable investment. In this way, some investors will favour an asset for its nominal value (share or cryptocurrency price) and not for its intrinsic qualities. This bias has re-emerged with the explosion of cryptocurrencies, with some investors avoiding fractions in favour of crypto-assets with a low unit price, sometimes due to poor performance! In other words, they are more likely to invest in a cryptocurrency unit worth €10,000 than invest in 0.1 of a unit of a comparable cryptocurrency worth €100,000.
We're over the 100-word limit, but there was no reason to stop there!
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