Why Data Doesn’t Persuade Prospects Or Clients
October 12, 2015
by Dan Solin
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When investors are looking for a hedge fund to invest their money with, they usually look at returns. Of course, the larger the positive return, the better, but what about during major market selloffs? It may be easy to discount a hedge fund's negative return when everyone else lost a lot of money. However, hedge Read More
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I had a remarkable experience last week. I used only statistical data to persuade a reader of my books. More often, however, there are far better ways to influence and gain the trust of a prospect or client.
The reader told me that his broker was recommending a family of funds that had “consistently beaten the market.” I have heard this claim many times before, so I asked for the names of the funds. Here’s what I discovered:
- None of the funds had been around for more than four years.
- Since inception, the funds either underperformed or marginally equaled their benchmark returns.
- In some cases, the benchmark was not appropriate.
- Year-to-date, however, some of the funds had significantly outperformed their benchmark.
The broker, it turns out, was deceptively selecting returns year-to-date and omitting returns inception-to-date.
The reader was so upset that he fired the broker.
Why was this experience so unusual? Because data rarely persuades.
More typical experiences
Another reader wrote in to say that he was making a big bet on the energy sector because “it was obvious it had nowhere to go but up.” I explained that, if this were indeed “obvious,” it would already be incorporated into the price of energy stocks. My explanation did not persuade him.
Recently, an investor told me that he had 100% of his small investment account in one risky NASDAQ stock. The stock was in the same industry in which he worked. He was confident that the stock was “poised to take off.” Without providing any opinion about the future direction of the stock’s price, I described concentration risk. I thought this was a dispositive argument. He was not convinced.
Why data doesn’t persuade
Our brains are wired to pay more attention to emotional stimuli than to neutral stimuli. As a consequence, we are unlikely to focus on data unless it makes an emotional connection with us. There’s compelling evidence that we may not have full control over the manner in which our brain pays attention to emotional stimuli. To some extent, it’s an automatic reaction.
To get your prospect to pay attention, you need to stimulate an emotional response. Fortunately, this is not difficult.
The power of negative emotions
In his excellent book, The Upward Spiral, Alex Korb notes that all emotional stimuli are not treated equally by our brains. We seem to react more strongly to negative events than to positive ones. Korb, who holds a PhD in neuroscience, observes that “we experience negative events more personally and we feel them more deeply.”
There is support for the view that, in order to maintain flourishing mental health, we need three positive events for every negative one. Korb explains that this means we require “three positive comments from a friend for every negative one, three wins at work for every loss.”
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