In this second article Russell Ross-Smith charts a further assortment of cognitive biases, or glitches in the human software of reasoning.
As a super-rational money manager or distribution professional you may consider that the psychology of decision making and judgement has little place in your workplace.
In Templar’s work with asset managers we see many examples of client meetings where mandates are lost to competitors because representatives did not have the tools to consider the subconscious levels in communication. Understanding how to conduct a critical client meeting with the maximum chance of success becomes easier if you understand how to communicate for particular situations.
How likely is it that you, as the expert in your field, knows which characteristics of that field will resonate with your audiences? Surprisingly unlikely, judging by recent research by Richard Bina and Dr Carl Marci.
They were looking to judge the effectiveness of images and features designed into a Honda car advert which had been created by the car’s designers and marketers. Bina and Marci tracked the eye and brain patterns of a group of ordinary TV watchers of the advert in among an hour of standard TV scheduling.
The results indicated that there was almost zero correlation between words and images that triggered responses in the watcher group and those that the advert creators thought would be attractive, based on their expert knowledge of the car.
Bina and Marci call this “Expert blindness”: the possibility that you (expert) lose objectivity when trying to anticipate what will influence the audience. Often this may simply mean that we are too close to the material we’re discussing.
Let us look at biases that may be relevant here.
Empathy bias (or gap)
Much of human understanding is state-dependent: people in one state of mind can struggle to understand people in another state. For example, cold/hot state is where you cannot envisage how you will think or behave when faced with agitation.
If you as an asset manager are talking with a client about a hypothetical situation remember that it’s unlikely that they’ll be able to visualise that situation without you painting a vivid, imaginable picture of that scenario. The idea of a 10% downturn is very different when considered theoretically compared with how it feels in practice.
Don’t skip over limitations or flaws in your fund’s strategy when you are presenting the fund to a new client. Then, when it happens and they are likely in a “hot state”, you will be able to remind them of their “cold state”, rational view. Too many of us fail to prepare the ground ahead of difficult discussions so cannot fall back on earlier conversations.
The duration of an event doesn’t necessarily correlate to the pain/pleasure it creates. A short sharp drawdown can feel as painful as a long grind: generally we recall negative events more clearly than positive ones (negativity bias).
What, then, if you need to explain a period of underperformance to a client?
First, recognise that you will feel vulnerable and may appear defensive and likely to over-explain the reasons. Here are some thoughts to help avoid this behaviour and still neutralise the client’s likely bias.
You need to achieve two goals in the interaction: of course you must go through your reasons and consequences thoroughly and dispassionately, but you must also at both the start and the end of the conversation put the period into perspective – remind your audience that it’s a limited phase.
If you can make the statement truthfully, remind them you discussed this pre investment and that such a period was likely at some stage and even how it would feel at the time. Although this guide might seem obvious the effect is powerful, primarily because so few people do this. You should be trying to bookend the conversation so that the under-performance is seen in perspective.
Remember one further bias will be working against you in these situations – Fundamental Attribution Bias. (this is the tendency to attribute cause to internal factors such as character or attitude rather than to external factors). Your audience may subconsciously be blaming your execution rather than the market forces and you need to counter this.
In the third part in the series next week, Russell will look at a final selection of biases that asset managers should recognise and be prepared to accommodate in their client interactions.
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.