Can We Ever Get You To Change Your Mind?

Despite all the warnings against using past performance as a measure when selecting a manager or fund, investors still do it. Perhaps a different tack is needed to help change this habit.

- Anne Cabot-Alletzhauser

Let’s try a totally different tack this time. No matter how many times investors are warned that past performance is no indicator of future performance, you, the investor – with much encouragement from the marketing departments of asset management companies – will still revert to past performance as a critical component in manager or fund selection.

We researchers cling to the notion that the more we educate investors with the right data, the more convinced our audience will become to the “rightness” of our argument. We can prove categorically – with all sorts of quantitative and qualitative metrics – that any belief that past performance is a good proxy for manager potential in the future is completely unfounded.

But here is the harsh reality: all that research will do little to change this old habit – investors, consultants and decision-makers will still insist on relying heavily on that past performance.

So, let’s take a leaf from a different branch of analytics: behavioural psychology. Let’s look at some interesting work being done with behavioural change for both substance abusers and patients who cling unhealthily to quack medical theories.

Here a new line of therapy is emerging that is having surprising success – Motivational Intervention (MI). These therapists start with the view that rational answers and scientific or statistical proof mean little to individuals where the flawed messaging of the group is far more alluring to individuals than rational answers and scientific or statistical proof.

The trick to prying individuals away from these harmful affiliations and belief systems is to shift emphatically to nonjudgmentalism, while at the same time helping the individual develop a whole new value and belief system.