Trick of the mind - The brain’s instinct to form connections does not always serve investors well


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

Of the myriad summer holiday-related commercials currently to be seen on television, how many can you think of that feature depressed, unattractive and ill-looking people? Not too many – and that is because everyone in Adland is counting on your brain making positive associations with all the beautiful, happy and healthy-looking types who actually populate their creations. 

This is what our brains do – they make connections between things. And everybody in marketing works on the basis that, just so long as these connections are reinforced enough over time, we will begin subconsciously to associate businesses’ products and services, brands and logos with whichever positive underlying characteristics they want us to. 

What we have at work here is the ‘affect heuristic’ – the term behavioural psychologists use for how people’s likes, dislikes and other emotions influence what they believe or how they think about the world. It could, for example, explain why, for almost five decades now, bookmakers have made a fortune from English football fans betting – regardless of the actual odds – on England winning a major tournament. 

To illustrate just how powerful a hold the affect heuristic can exert on people, we give you the latest in the growing catalogue of scientific experiments enlisted by The Value Perspective to help make our various points. This study involved a number of students being asked whether a particular piece of music would be well-suited for an advertising campaign for a pen. 

Half the students were played pop music, as it was assumed they would like that, while the other half were played music it was assumed they would dislike, which – rightly or wrongly and for whatever reason – was ‘classical Indian’*. While the students listened to the music, they were shown the image of a particular coloured pen and, when they were finished, they could choose a free pen. 

Their choice was between the colour of pen they had seen as they listened to the music and a different colour – and the results were pretty stark. Rather than a 50/50 split, as one might expect, it turned out a clear-cut 70% to 80% of the students chose the coloured pen that had been shown with the ‘positive’ pop music, while just 20% to 30% had gone for the contrarian option. It didn’t matter which particular colour of pen was matched with the pop music, the students’ tended to prefer the one matched with the music they preferred.   

In other words, subconsciously linking something people liked with a particular colour led, in a very short space of time, to a disproportionate desire being imprinted on the brain. Furthermore, the study not only illustrated the speed with which a positive association could be established but how quickly a more negative relationship could be too. 

You can, of course, see the same thing in the world of investment – and particularly in relation to more negative associations. It is no more than human nature for people to pick up on things they do not like about a company – whether that be an oil major polluting the environment or a bank paying very large bonuses or simply a business going through a tough time and its share price falling as a result. 

As we saw with banks in 2009 and are arguably seeing with supermarkets and miners today, when the mood music, i.e. newspaper coverage, analyst commentary etc. is downbeat  investors can end up feeling a lot more negatively towards stocks than a more objective appraisal of the investment reality might warrant. This is compounded by the fact that the media and others often sensationalise the problems a company is facing in order to create a more interesting story. It is in aiming to be more disciplined and focused on the numbers – in effect tuning out the music (whether pop or classical Indian) – that we aim to make a living as value investors. 

*For the avoidance of doubt, and unlike the Professors involved in the experiment described above, here on the Value Perspective we have nothing whatsoever against classical Indian music.


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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