Wednesday, November 29, 2006

The Ewwww! Factor

Let me toss a list your way and see if you can figure out the connection among these items:

* Michael Jackson
* Michael Richards
* The proposed O.J. Simpson book
* The Republican Party
* Pee Wee Herman

Quite simply, if you asked my teen-aged children or their friends about any of the above, one of the first words you'd be likely to hear is "Ewwww!"

"Ewwww!" is a very special term. It doesn't connote dislike. It expresses disgust. Complete and utter disgust.

Someone vomited on the school floor? Ewwww!

That kid who never used deodorant in junior high school? Ewwww!

The creepy teacher who looks at girls the wrong way? Double Ewwww!

The thing about "Ewwww!" is that, for all practical purposes, it is a final verdict. Once something is "Ewwww!", it never turns around and becomes "Cool" or "Cute".

In other words, once you've hit the "Ewwww!" point, you're toast.

Just ask the Republican Party in the wake of Congressional Page scandals or Michael Richards after his very un-Kramereque racial diatribe.

People can bounce back from dislike or even distrust. But not Ewwww!

Having spent years in Upstate New York, my wife and I were spoiled by shopping at the wonderful Wegman's grocery chain. Now, we live outside Chicago and dislike our area groceries. But we shop there. One day, however, we visited a store that had dirty floors and unkempt displays.


We left and never returned. And never will. That's the way it is with Ewwww!

You're probably wondering what this has to do with investing. My hunch is that it might be quite relevant.

You see, we are hard-wired to experience disgust. The facial expressions that express disgust in one culture are universally recognized in other cultures. And many of the things that disgust us also disgust people around the world: from feces to spoiled food.

It makes evolutionary sense. Memories of disgusting experiences keep us away from what is bad for us. Some of the earliest studies of single-trial learning in animals (i.e., learning that does not require repeated practice) tested memory for disgusting food. It appears that dogs and mice have their own versions of Ewwww!

What makes humans different is that they can attach disgust to social experiences, not just physical stimuli. That means that companies and their products can evoke the Ewwww! response. And that means that we have an interesting pairs trading strategy: short the Ewwww! stock and go long the correlated, acceptable company.

If I had listened to my kids and their friends, for example, I'd be short Wal-Mart ("Ewwww!") and long Target (see above). No one, but no one, among their peer group would be caught dead in Wal-Mart. But Target? Those Choxie candies are cute...and how about those flip-flops on sale?

Come to think of it, the Ewwww! factor would have long ago had me short the American autos ("Ewwww!") and long Toyota/Lexus.

And I'd have been short Dell ("Fire in my laptop??? Ewwww!") and long H-P.

The great thing about "Ewwww!" is that, because it's hard-wired, it doesn't turn around in a day, week, month, or even year. Sometimes it doesn't turn around ever.

I guess you could say the "Ewwww!" factor is the opposite of Warren Buffet's investment strategy. He would have you buy the companies you directly experience, understand, and really like. Trading by "Ewwww!" has you shorting what people absolutely can't stand and buying its favored alternative.

Just the other day, we stopped off at a local eatery known for its fresh fast food.

Earlier, we had passed a McDonald's, and I offered to stop. Daughter's verdict: "Ewwww!"

No longer cool to be part of the "fast food nation".

Another family trip, another investment idea percolating.


yinTrader said...

Hi Brett

How about 'grossed out' - real American slang and cool?

On a serious note, I recall you mentioned TICK, TRIN and TIKI some time back.

Can you please direct me to a website for such indicators especially for TIKI, Dow 30?

Thank you.

Anonymous said...

I think you forgot Pee Wee Herman (Paul Reubens), who no matter what he does, will always be associated with Ewwwww!

Anonymous said...

The BBC article just skims over the surface of this interesting subject. It says that feces and rot are universally disgusting, but this isn't quite true. All children until they are about 3 will willingly eat fake feces (constructed out of peanut butter and rank cheese), but around 3 they stop. At this point, they stop eating pretty much everything except those foods that their parents eat and their parents feed them. It is around this point that they also develop religious-inspired disgusts such as eating kosher.

So yes, there is a cultural component (the foods that they are fed at this age are cultural), and there is a genetic component.

As for how they measure disgust, it seems to vary. Two common attributes seem to be the "law of contagion" and the "law of similarity" (named tongue-in-cheek after the old alchemists). If something is disgusting, then brief contact with another food, even if the first is fully sterilized, makes the second untouchable. Imagine drinking a Coke after a sterilized cockroach had been dipped in it.

The "law of similarity" is that if something is disgusting, then things which remind us of them are disgusting. For example, imagine drinking soup out of a sterile bedpan, or eating imitation dog feces.

There are also some things which are disgusting only in context. We all have no problem swallowing our own spit provided it is in our mouths, but few people would eat soup that they had spat in.

Steven Pinker has a whole chapter on disgust and what it can teach us about our minds in his book "How the Mind Works."

Not that any of this has anything to do with trading. But I had a great image of dunking a sterilized Michael Jackson in a coke and seeing who would drink it.

Anonymous said...

Interesting. However, doesn't some of these trades have a hindsight bias in them? perhaps the Ewwww factor is better suited for CHS,PSUN, URBN and the like (more discretionary products or services) where such emotions may have a larger role...Any thoughts?


Wcw said...

Funny, but..

..true of WMT essentially since inception. True of Dell since the early '90s when they were the easy-to-buy crap brand. True of MCD since they started putting cow in with the steer to cheapen (and lean) the burgers.

'Tain't enough for a trade. It is useful for a tip.

Brett Steenbarger, Ph.D. said...

Hi Yin,

I'm not aware of a website for TIKI. It is generally available on real time data feeds, such as e-Signal.


Brett Steenbarger, Ph.D. said...

Hi Downtown,

Yes, indeed! Mel Gibson and Tom Cruise have had their share of Ewwww! moments as well--


Brett Steenbarger, Ph.D. said...

Hi Tyro,

Thanks for the perspectives and the Pinker reference. It is very interesting to see the interplay of culture and biology in disgust. I'm old enough to remember the complete disgust people felt for the stock market in the late 1970s and early 1980s. It took quite a rally into the 1990s to turn that around.


Brett Steenbarger, Ph.D. said...

Hi Sreeram,

Yes, my examples were provided in hindsight to illustrate the point, but I do think that discretionary products in which quality (or lack thereof) is readily apparent are perfect candidates for halo effects and disgust. Hint: read the Amazon reviews for products and construct your own index...


Brett Steenbarger, Ph.D. said...


Yes, I think you have it right. Those disgust reactions are a kind of tip-off, a spark to look into something further--not a complete trade idea unto itself. Consumer comments on the Web sometimes form a pattern, and that's worth checking out--