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Why Behavioral Economics Matters.

Decision making is at the heart of investor marketing. What deals get funded, who attracts attention and who ends up under funded and recognized will all be decided by how investors feel. 

For over sixty years the benchmark framework for studying agents decisions whose consequences are uncertain has been the expected utility model. But anomalies from research in psychology and and economics have lead to changes in expected utility model and economic modeling overall. 

With these new insights come a better understanding of who investors are, what they do, and why they do what they do. 

One change companies most make if they want to attract more shareholders?Communicating their story in a clear, compelling way. Get rid of the bland websites and boring copy. 

Companies rationalize: “Investors only care about numbers. They don’t care about our story”, but they could not be more wrong.

For decades, traditional economic theory taught business leaders that the best way to compel investors to take action was to “wow” them with numbers and data so thats what they do. Fortunately, there is a better way.

Enter a more enlightened economic model: behavioral finance.

Behavioral finance combines economics and psychology.

Traditional economic theory assumes people are perfectly rational, patient, logical little robots. Behavioral finance, on the other hand, accounts for the fact that investors are creatures driven by feelings first.

Traditional economics and behavioral economics are different. See how.

Traditional Economics Says . . . Behavioral Economics Says . . .
People are endowed with the capacity to efficiently and effectively acquire and process all relevant information. People are not endowed with the capacity to efficiently and effectively acquire and process all relevant information. They do the best they can, given the constraints they face.
People can figure out and factor in the future consequences of current decisions. People aren’t always able to figure out the future consequences of current decisions, especially in a world of uncertainty.
People always make smart decisions; ones they don’t regret. People can and often do make decisions they end up regretting.
People always make decisions in an ideal decision-making environment, where they have all the information they need and time to make the best possible decision. People often face decision-making environments that prevent them from making the best possible choices. Think “Is our marketing material one of them?”
Wealth and income maximization are all that matter. Being fair, doing the right thing, maintaining a good reputation, and pleasing friends, neighbors, and partners are also important, even if they come at the expense of some wealth or income.
People aren’t influenced by anyone or anything else. People are influenced by their peers, their past, and their circumstances.
People are narrowly self-interested, and this is the only rational way to be. Many people are narrowly self-interested, but altruism and ethics also can be important motivators for behavior.
How hard and well people work is assumed to be fixed, usually at some maximum point. Therefore, people don’t change how hard they work and productivity can’t be affected by the work environment. How hard and well people work is determined by their work environment and by their individual preferences. What this means is that while some investors will work hard to try to create a positive narrative about your company, most won’t.
People are pretty much all the same. People are different, with different tastes and preferences.
Markets are efficient, even if they appear to be inefficient. Efficiency is everywhere. Markets can be highly inefficient, and if they look inefficient, they probably are.

Investors are people first.

What does all this mean? Well, first and foremost it means investors are people, naturally driven by emotion, not the robots economists thought they were.

Skip the data dumps. For investors to become shareholders, first they must like you. Make it easy for them. Connect with them, help them feel smart, help them see why you matter. Important to remember when it comes time for your next press release or website update.

 
To see how investors connect with your story or how compelling they find it, contact us today.

 

 

 

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Mark McKelvie

Founder, CEO Investor Testing. If you want to find out how clear and compelling investors find your story ask them to explain it to you in their own words and watch what happens.

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