Lately, I have been reading and listening to a lot of behavioral psychology. I find the subject really insightful into how some businesses are discovering success in their markets. Finding examples of the qualities of well-run companies is always about seeking information from many sources. Although Trader Joe’s is privately held, it is still proffers ideas on stock selection. Successful companies ALWAYS think differently.
Trader Joe’s has been successfully using behavioral economics to beat the pants off their competition. I consider these podcasts, such as the linked one, as a key to uncovering companies with sustainable competitive advantages.
While this linked program is rather long, I found it fascinating. Trader Joe’s is doing a whole lot that is unorthodox, but they have created a very effective business. The result of that effectiveness is a highly profitable business.
While there is a plethora of different behavioral economic insights in this podcast, one simple example of how Trader Joe’s uses behavioral economics hit me square between the eyes this last weekend. There is nothing like a personal experience to drive an idea home.
When my house was built, the plumbers didn’t place the master tub on a bed of mortar. Morons! The weight in 30 plus gallons of water is extremely high. Without the mortar base, the tub was bound to crack. Well…it did crack, so I am in the process of removing and replacing the damaged tub.
I do all my own work around the house from construction, plumbing, electrical, mechanical, etc. (I’m learning HVAC, but still have way to go!). I took out all the tile from around the tub, disconnected the hot and cold water feeds and the waste pipe. That’s when I saw that the construction people skipped the mortar bed under the tub. That has a lot to say about why I choose to do the work myself. I also do it because I am an inveterate learner and hands-on person.
By the way, I have to thank my youngest son who was a real peach helping me remove the 250 pound corner tub from the upstairs bathroom to the curb. He was great. One slight bump against the any wall would have created a BIG HOLE. For me, doing drywall work is one of my least favorite jobs. Luckily, we gently moved it out without any damage. Thank god! I did get a lot of strange looks from my neighbors when they saw the tub at the curb. Fortunately, some frat guys my son knew picked the tub up for their frat house!
Anyway, back to my story. My wife (the designer) and I went to Floor and Décor to pick out new tiling. Like any other guy, I thought (mistakenly) it would be a quick process. Five hours later we left the store with the new tile. I should have known better. I was mentally tapped out. Next time, I’ll know better.
Floor and Décor has hundreds of different tiles. It was mentally taxing. Like most husbands, I let my wife make the decision after realizing what would happen if I weighed my opinions too much into her “suggestions”. As long as the tile was “in-the-ballpark”, I went along with it, but it still took FIVE HOURS.
Now back to Trader Joe’s. Trader Joe’s has only a few types of each product. Therefore, the decision is much easier than picking from hundreds of different types of tile. Behaviorally, too many choices cause mental stress. When the choice set is smaller, it is much easier to select. Trader Joe’s uses this effectively. The result is many more sales.
You might find the lack of selection to be at odds with more sales. That is why behavioral economics is so important. What you think will happen is often not the case and that is why behavioral economics is so…. important.
Listen to the program and I’m sure you’ll learn quite a bit about successfully applying behavioral economics to business. I found it extremely interesting and useful in selecting more stocks for my portfolio.
Now, with thousands of stocks to select from, I’m hoping this new information makes the whole process much less mentally taxing! Soon I'll have a new tub installed where I can relax and give it some serious thought.
