Part 1: The power of psychology in asset manager meetings

Cognitive-bias

In this three part series Templar consultant Russell Ross-Smith will be taking a look at cognitive biases and in particular how asset managers might recognise their potential power in client meetings. Each article will examine a selection of biases, ranging from the well-known to the esoteric.

I was working with a fund manager client when I asked the Head of Consultant Relations why his recent meetings hadn’t gone well.

Looking puzzled he asked me how I knew, and my answer was that it was obvious from his demeanour and the way he was talking to me as an (simulated) investor. He was creating a negative impression and although the fund’s performance had been reasonable, his language and style were projecting a poor and defeatist impression.

Unconscious biases and our tendency to be affected by them is mainstream news. Names like Kahneman & Tversky, Thaler & Sunstein have written best-selling books. Other bodies of research by psychologists and neuroscientists are well understood by marketers and others – including governments – who seek to influence the citizen.

In our work with asset managers around the world we see a growing disconnect between the highly rational, evidence-based approach most fund managers use in presenting, and the less rational but equally effective ways of framing thinking and outcomes in client meetings. 

Logic and rationalism only gets you so far: we have seen some managers start to win and retain mandates through better understanding of the non-rational but fundamental elements of human interaction.

This series of articles seeks to expand your knowledge of biases with some thoughts around how to use them – and how to avoid them being used to your disadvantage. Some biases are similar to others and where that’s the case I’ve grouped them together.

Of course, you probably feel that you don’t suffer from such mortal failings but you recognise the possibility in others.  That in itself is a bias – blind spot bias!


1. Confirmation bias

Possibly the best known of all biases. We take greater notice of information that confirms our existing opinions than we do of contrary information (which is why making a good first impression is so important).

If you know you are going to be speaking with a client who has a long-standing concern, how can you minimise the effect that this bias will have on them during your conversation?

One suggestion is that you state your intention to confront the concern when you organise the meeting. In this way they will arrive at the meeting with their concerns at the front of their minds. Otherwise they are more likely to be in reactive mode, channeling thoughts and feelings that were laid down in the past. Reactive mode is instinctive and slow to change so you’re unlikely to achieve your desired outcome.

2. Outcome Bias

Many people will judge a decision based on the outcome as opposed to the rigour applied to making the decision. This means that lucky decisions that pay off are far less scrutinised than sensible decisions that didn’t.

A way to neutralise the effect of the latter is to remind your counterparty of the reasoning behind the decision and where possible using the present tense and specific data to give prominence to the process not the outcome.  Example – “in October we were discussing the fund’s allocation to stocks with high ROCE. At the time we agreed those stocks were vulnerable because their defensive qualities had made them expensive, but that the allocation was a risk worth taking.”

3. Decoy effect

Decoy effect is the skew that occurs between two options when a third option is introduced. (It’s similar to scope insensitivity which is the disconnection between one’s willingness to pay and the scale of the outcome range.)

In other words, the size of an agreed payment depends more on the alternatives than the absolute amount. Decoy effect can be used to make an option appear more or less palatable depending on the alternatives.

One of the most dramatic recent examples in the UK was a YouGov survey which asked members of the public how much they would be prepared to pay the European Union in exchange for Brexit. (This “Brexit divorce bill” survey occurred mid-August 2017 and was a rerun of a poll conducted in April but with different amounts for the bill).

In the August poll, 41% said that up to £10-billion was acceptable where previously only 15% had accepted this amount. Had opinion really moved?

While £10-billion was the smallest amount in the later survey, the earlier survey had given a lowest option of £3-billion thus (inadvertently) making the £10-billion appear lower in comparison to the alternatives. The point is that most people make a choice within the relative framework of the options presented rather than the absolute amount.

This may have interesting ramifications when one considers how management fee structures are discussed.

In the second part in the series, Russell will chart a further handful of cognitive biases that’s relevant to the asset management industry.

If you face clients on behalf of an asset management firm and want to improve the outcomes of your meetings, please email us or complete the form below.



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