We are all biased. Why? Human brains evolved with many cognitive biases and heuristics because in the distant past they helped our ancestors.
Today’s world looks very different from the one we evolved in. But these cognitive biases remain and their influence is undiminished.
In our work with fund managers, we regularly see evidence of the same cognitive biases across their marketing materials. Here are just five of them:
1.Don’t dilute your message
Information bias is the tendency to seek more information even when it won’t impact the result.
Finance types may be particularly susceptible to this bias because data drives decisions in banking and fund management. More data makes for a better model. This encourages them to add as much information as possible to their marketing materials.
Consider a fund marketer debating whether to add some information to a marketing deck. The information is accurate, relevant, and paints the fund in a positive light.
Our fund manager applies the logic of Kafka: “It is better to have and not need, than to need and not have.” They include the additional information and expect one of two things to happen:
- The investor will find the information compelling, making an allocation more likely.
- The investor will not find the information compelling and will ignore it, with no discernible impact on the allocation decision.
The problem is even positive information can distract the investor from the things that will actually move the needle.
2.Use the right ingredients
A related pitfall is the availability heuristic, which is our tendency to overestimate information that is available.
In fund marketing, it leads to building stories around the available data, rather than putting the story first and choosing the best data to tell it.
It’s like in cooking. If you start substituting ingredients to use up what you have in the cupboard, the results will be unpredictable. It’s better to follow a recipe and make sure you have the ingredients you need.
It’s amazing how often we see a great story get twisted over time to accommodate new information that becomes available – invariably to its detriment.
3.Avoiding risk is risky
Asset managers take investment risks every day – so why are they so reluctant to take marketing risk?
Investors have thousands of funds to choose from. Understanding the differences between them is difficult – which is where your messaging and marketing comes in.
Taking a sensible amount of marketing risk helps a fund stand out. So why don’t asset managers do it?
It’s because of zero risk bias – the inherent preference for eradicating as much risk as possible.
It’s the same logic that leads to herding among many long-only managers. They sacrifice the possibility of outperformance to prevent underperformance.
Investors see a lot of marketing decks. An investor cannot allocate to a fund they cannot remember. If you want to be memorable, you must be different. Your deck should say what other managers aren’t saying. It should look different to other decks.
That probably makes you feel nervous, but those nerves are healthy. It is better to stand out from the crowd than to be lost in it. By standing out you will, of course, scare some investors away, but those investors are not the ones most likely to invest. The investors most likely to invest are those that share your world view, that think like you. Help them find you by confidently announcing what makes you special.
4.Pay more attention to failure
It’s all about trying new things – and paying attention to failure as well as success.
It’s human nature to focus more on replicating what has worked than understanding why an alternative failed. That’s right – survivorship bias exists outside of hedge fund indices… it also pushes fund marketers towards the same marketing strategies as their peers.
Doing that only makes sense if you discount the funds that failed with those same marketing tactics. They are legion.
We cannot truly know success without first understanding failure. What looks successful at first glance may appear less so in a broader context. A strategy that failed for someone else may be more successful for you.
5.Don’t be an ostrich
It’s scary going outside your comfort zone, and all too easy to ignore advice that tells us we should.
Beware the ostrich effect! This is our well-known tendency to ignore what we would rather not see.
It’s rife in fund management – notably when managers go quiet because their performance has been poor.
In fact, when performance is bad you should be at your most vocal, because investors rarely fire managers for poor performance. The cardinal sin is poor communication around that performance.
Next month we’ll look at more cognitive biases and how some can be harnessed to your advantage when marketing your fund.
In the meantime, if you need help making your fund stand out from the crowd, our IR and Marketing team can help you understand what level of marketing risk will deliver you the greatest returns.
For more information about this blog please contact Sol Teague
