that the last price from another bidder was reasonable, and then Deprival-Super-

reaction Tendency prompts him strongly to top the last bid. The best antidote to

being thus triggered into paying foolish prices at open-outcry auctions is the

simple Buffett practice: Don’t go to such auctions.

 

Deprival-Superreaction Tendency and Incon- sistency-Avoidance Tendency often

join to cause one form of business failure. In this form of ruin, a man

gradually uses up all his good assets in a fruitless attempt to rescue a big

venture going bad. One of the best antidotes to this folly is good poker skill

learned young. The teaching value of poker demonstrates that not all effective

teaching occurs on a standard academic path.

 

I myself, the would-be instructor here, many decades ago made a big mistake

caused in part by subconscious operation of my Deprival-Superreaction Tendency.

A friendly broker called and offered me 300 shares of ridiculously underpriced,

very thinly traded Belridge Oil at $115 per share, which I purchased using cash

I had on hand. The next day, he offered me 1,500 more shares at the same price,

which I declined to buy partly because I could only have made the purchase had I

sold something or borrowed the required $173,000. This was a very irrational

decision. I was a well-to-do man with no debt; there was no risk of loss; and

similar no-risk opportunities were not likely to come along. Within two years,

Belridge Oil sold out to Shell at a price of about $3,700 per share, which made

me about $5.4 million poorer than I would have been had I then been

psychologically acute. As this tale demonstrates, psychological ignorance can be

very expensive.