The Hindu Business Line : Advice: Why fee is better than free

A person I know asked me for some free investment advice sometime back and I obliged for a fortnight. I later found that he acted on paid-advice even though my free advice turned out better during that fortnight.

This person is not alone in his behaviour. All of us value paid-advice more than the free advice we get, irrespective of the quality of the advice. Why?

Suppose you buy a ticket to watch a movie for the weekend. As the weekend approaches, you feel tired and want some rest. But the money spent on the ticket troubles you so much that you drag yourself to the theatre. You have a miserable time staying awake through the show. But you are happy that you did not waste the ticket!

Acting on paid-advice

Your decision to go to the theatre should have been based on whether you would have enjoyed the movie or felt good resting your tired body at home. The ticket is sunk-cost — not relevant for the decision on whether to go for the movie or not.

It is the same with advice. Often, we act on paid-advice because we feel compelled to justify the steep price we paid to get the advice.

There could be another reason we value paid-advice. Behavioural psychologists call it cognitive dissonance. This refers to the conflict in the mind when we realise that what we believe to be true is in fact not so.

Suppose you receive paid-advice that is inconsistent with your beliefs. Yet, you know that you do not throw good money on wasteful advice. You resolve this inconsistency by believing that the advice is worth more that it actually is. And so you act on it.

An experiment conducted recently showed that people tend to value advice based on the price they pay for it. It seems that we value advice the same way we value other goods — the costlier it is, the better it should be. This understanding has taught me a good lesson. I do not give free advice anymore!

(The author is an investment strategist.)

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