This post was first published on capitalmind.in
Amazon is famous for being customer-focused. Jeff Bezos’ shareholder letters over the years emphasise this focus. Here’s one excerpt:
Senior leaders that are new to Amazon are often surprised by how little time we spend discussing actual financial results or debating projected financial outputs. To be clear, we take these financial outputs seriously, but we believe that focusing our energy on the controllable inputs to our business is the most effective way to maximize financial outputs over time. Our annual goal setting process begins in the fall and concludes early in the new year after we’ve completed our peak holiday quarter. Our goal setting sessions are lengthy, spirited, and detail oriented. We have a high bar for the experience our customers deserve and a sense of urgency to improve that experience.
The pioneers of ‘one-click’ buying and free one-day delivery set the bar high for transacting online. But you don’t need to be a web design expert to notice all the nudges pushing you to buy.
On this randomly picked Amazon product page below, I count at least eight elements to make you buy the product now.
The lock icon signals a “secure transaction”, so we trust the site. “Offers” sweeten the deal and “Amazon’s Choice” build confidence.
The other nudges create FOMO (fear of missing out): “Deal of the day! 69% off”, “Order within [countdown timer]”, “In stock” convey scarcity, urging us to act fast.
Everything on the page says, “This is a great product at a steal of a price, but only for now. Supplies might not even last the day. Buy!”
If you needed a backpack and saw this, you’d feel lucky to save big. You’d click “Buy Now” and feel good.
But the three-month price history of the product might make you feel differently.
The “deal” ₹899 price is the typical price. You’d be unlucky to pay 50% more. And this “deal” is 6% higher than in May, 12% higher than March/April.
Did Amazon do anything wrong legally or in spirit? You got a decent backpack at an ok price when needed. Research even says discounts trigger happiness and trust. If true, the nudges made us better off than if the page just said, “The usual price. Plenty in stock. Buy whenever.”
FOMO nudges are everywhere.
Hotel and travel sites like booking.com say, “Only two rooms/seats left at this price”. Food delivery apps emphasise “this weekend only” discounts. Fashion retailers like Zara are famous for “limited edition” collections. Nike also offers limited edition sneakers on their SNKRS app that sell out quickly. The list can go on.
FOMO in Finance and Investing
In Investing, FOMO gets tricky.
The only equivalent of the “26L water-resistant backpack” or “1 king bed, 330 sqft garden-facing room” is the “7.5% 366-day Fixed deposit”. You know exactly what you’re getting and when you’re getting it. Every other investment product has uncertainty baked in, no matter what the marketing deck says.
That active smallcap PMS investment strategy could be UP or DOWN 70% next year. Even the low-cost index fund with the long-term 12% return expectation will certainly return significantly higher or lower than 12% next year.
It’s like ordering a backpack but getting anything from an mountaineering-grade backpack to a jute sack! The range of probable outcomes in investing is ridiculous.
Like the examples above, Finance and Investing is a business. This means the players also adapt and nudge to “close the sale”. Every seller of anything investment-related does it—every seller. The difference is in the levers they employ and the degree to which they use them.
Four common nudges sellers of investment products use:
1. Offer many products
Also known as “Spray and Pray”.
A brilliant strategy can get hammered in any given year. A completely random strategy can have a blockbuster year. Therefore the wider the product assortment, the higher the chance that at least one looks good in the near term.
So they offer several options, variants of the same core philosophy, or completely different strategies named after buzzword-filled themes. It doesn’t matter. And deftly shift emphasis to what looks good at the time and therefore look brilliant all the time.
Intermediaries and platforms do this even better.
2. Shiny new things to match trending narratives
When the student is ready, the teacher appears. – Lao Tsu or the Buddha (depending on who you believe)
In investing: When the market is ready, the investment product appears
If you’re an email hoarder, look through your archives for NFO (New Fund Offer) emails going as far back as possible.
Two things will stand out:
- NFOs cluster around market highs. The time when everyone and their cousin is getting interested in equities is the time new funds appear. Applies to IPOs too.
- Thematic and Sectoral narratives coincide with respective fund launches. International (read US stocks) surging? International Fund of Funds appear. Have defence stocks been going gangbusters? Boom. Three new “India Defence Indigenization Megatrend” funds launch.
If you practice inbox zero, try plotting various sectoral NFO dates on the respective sector index chart. Most points will plot near sector index peaks.
3. Always certain
When asked, “What will X event do to sector Y” they exude certainty.
What is the impact of the Russia-Ukraine on IT services margins? De-dollarisation? Generative AI? The next NVIDIA? The subject doesn’t matter. Confidence does.
Financial media demands quick and easy answers. Correctness is optional, and nuance is an inconvenience.
If they don’t offer answers, someone else will. So sound bites/articles/tweet threads explaining it all simplistically, its impact and what investors should expect. Since no one’s keeping a scorecard, so there is no downside.
Oh, and the most common conclusion: “Bullish on Indian equities. The next decade will be awesome.”
4. Say you’re missing out!
“This strategy just did a gazillion% last month. Get on board now so you don’t get left behind.”
Subtle as a sledgehammer, but it must work, given how often we see it.
Combined with the first lever of many products, highlighting recent performance of the month’s flavour is a cannot miss sales nudge.
And so, Caveat Emptor
means Buyer beware in Latin.
Businesses exist to generate returns for their shareholders. They must stand out in crowded marketplaces against similar and usually intense competition and make the sale. The business of investing is no different.
In a way, it doesn’t matter that an Amazon “Deal of the Day” is just the usual price. As long as the product it delivers is the one it shows and is of decent quality.
Whether the hotel really only has two rooms left when you booked doesn’t matter as long as the room you check into matches the pictures and has the amenities listed on the booking page.
But investing is different because the same input leads to a range of outcomes, especially short-term, but even in the long term. Investing businesses employ nudges to make the sale: Many different products, participating in trendy narratives, sounding more confident than they feel, and inducing FOMO based on recent winners are just some of them.
Where does that leave the regular investor looking for the right way to invest?
Even on longer time horizons, you are guessing between the good, the so-so and the bad. A below-par investment manager will almost certainly erode wealth over longer time horizons. But even Buffett has underperformed the S&P500 for significant periods; there was also that time he incurred an opportunity cost of $12B from buying Dexter Shoes with BRK stock.
The good and bad investment managers are hard to tell apart. Hard but not impossible if you’ve been paying attention to what they say and do. They’ll all nudge; you just need to be aware of them. So, you can adjust your behaviour for your benefit, just like it’s helpful to be aware that 24 people are not actually currently on the hotel booking site about to book the very same room you’re considering.
- Focus on costs and taxes
- See through confident certainty. Anyone who seems sure of market moves or investment outcomes is overconfident at best, deceptive at worst.
- Markets are unpredictable, even for experts. Beware managers implying special foresight.
- Consider range of outcomes, not averages, and certainly not the “last 90 days”
- Question trendy narratives. Be especially wary of related investment pushes
- Balance is key. Diversify. Don’t rely entirely solely on any strategy, fund or narrative
- Stay flexible and open-minded. The future is unpredictable, and cycles are everywhere
- Ignore the hype – and stay focused on what really counts for your returns over time.
As of writing this, markets have been recovering and making new highs. Soon there will be no shortage of sales nudges implying innate brilliance and visions of quick returns. The more you understand them, the less effective the nudges become.
I’m on twitter @CalmInvestor