The Lollapalooza Effect

When several psychological tendencies of human behavior conflate, it produces a phenomenon called the lollapalooza effect. This term was originally coined by Charlie Munger, an American business magnate, lifelong learner, and longtime partner of legendary investor Warren Buffet, during his Harvard commencement speech in the summer of 1995In a lollapalooza, the symptoms of our psychological tendencies are greatly intensified. Let’s use gambling at the casino as an example to illustrate this profound concept.

At the casino, we are constantly surrounded by loud and shouting gamblers who appear to be having a great time. As human beings, what are we likely to do in response to this environment? We are likely to gamble along with them. As human beings, we have the natural tendency of following the actions of our peers – especially when we are in a confused state of mind and do not know how to properly act in a particular social setting. This is known as the Social Proof Tendency.

Casinos program their slot machines to frequently show a result that is close to the winning combination but not exactly the winning combination. When machines display lemon, lemon, lemon, lemon, banana, it induces the Deprival Super Reaction Tendency in gamblers. Human beings are naturally loss averse; an individual is likely to feel the psychological impact of a loss of 10 dollars more than to a gain in 10 dollars. Gamblers will feel as if they are being deprived of the monetary rewards from winning since they are often close to achieving the winning combination and scoring the jack pot. As a result of this powerful tendency, they will be more inclined to put additional quarters into the slot machines.

Next, I will talk about the Consistency and Commitment Tendency in human behavior. When individuals begin gambling, it is tremendously difficult for them to stop because human beings naturally like to be consistent with their past behaviors. As Charlie Munger would put it: “The human mind is a lot like the human egg, in that the human egg has a shut-off device. One sperm gets in, and it shuts down so that the next one can’t get in.” Once they have made up their mind to spend their night at the black jack tables, it will be difficult for others to influence their decision.

These are only some of the psychological tendencies at play that drives an individual towards gambling addiction. As described above, when several psychological tendencies work in conjunction with one another, it produces a lollapalooza effect which greatly intensifies our behaviors. By understanding these innate tendencies, we can significantly enhance our ability to make more rational and intelligent decisions in our everyday life. Continue reading