We are often taught that the best decisions are made when feelings are removed. Don’t let your emotions get the better of you, goes the saying. But scientific studies have shown that, in reality, emotion is a key part of all decision-making.
‘Emotions are a shortcut the brain uses to quickly distill lots of complex information into an actionable impression,’ says Richard Peterson, founder and CEO at MarketPsyche, a provider of financial sentiment data.
‘Unless we are calculating robots, emotions cannot be removed from decision-making. There are myriad assumptions, past experiences and mental frameworks that govern everything from what information we consider to how fast we pull the trigger.’
If emotion plays some role in all decision-making, we can assume it informs the way investors buy and sell shares. At least, that’s the case when the investor is human, rather than one of the growing army of algo funds.
This may influence how companies engage with the buy side. Some IR professionals view building an emotional relationship as a key part of strengthening the bond between issuer and shareholder. Others note that playing on an investor’s emotional response could run the risk of taking IR marketing too far.
Falling in love with the stock
‘You win over investors with a very rational story around forecasts and growth, and a financial model, but I believe you tend to keep them by building a relationship, which makes them become less rational,’ says Peregrine Riviere, director of IR at FTSE 100 advertising group WPP.
He gives a simple example: ‘They might have set an internal price target. But if you impress and they kind of fall in love with you, they may dismiss their price target because they just think you are a great company.’
On the flip side, emotions can also prevent an investor from buying shares. Ricardo Jiménez, a partner at Sigma Rocket and former director of IR at Ferrovial, gives the example of a fund manager who has bet on a particular idea and lost. ‘When this happens, it can be a bitter experience,’ he says. ‘The chances of that fund manager coming back to the stock are pretty slim, even if it becomes very cheap.’
Investor relations departments sometimes overlook the importance of appealing to the emotional side of investors, notes Riviere, who has long been interested in this topic. He gives a couple of potential reasons why that may be the case.
First, some IR departments may have a strong focus on the sell side, which encourages a more analytical approach as they spend a lot of time helping analysts build models. Second, some companies may be reluctant to open up their people to the investment community, preferring to keep a tight grip on who speaks externally.
For the most part, however, investors want a broader view than that, notes Riviere. ‘They want to understand the culture, the depth and quality of management and how people think at all levels of the organization,’ he says.
‘They want to understand what differentiates company A and company B in the same sector. That might be higher growth or better margins. But then the question becomes why do they have higher growth or better margins? That will probably come down to people, culture, things like that – so you need to find a way to demonstrate that.’
This is an extract of an article that was published in the Summer 2022 issue of IR Magazine. Click here to read the full article.