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An Accidental Experiment

The way in which a question is asked can influence investor decisions.


… the placement of words, subtle changes in context can influence investor decisions. Are investors being nudged into low yields regardless of risk?


I can manage the questions to make the Polls say what you want them to say.” – Media & Political Advisor, Sarah Harding, House of Cards.

You can make people say what you want but you can’t make them do as you wish. People are funny that way.” – Francis Urquhart, Chief Whip & Prime Minister elect, House of Cards.

An Accidental Experiment

Readers of this blog may have noticed the new look implemented at year-end. Updating to the newer technology brings with it cool new tools. Like Polls. Readers may have noticed the Poll on this home page during February and March.

On January 30, 2013, I added a Poll that asked the question “Are you bearish or bullish”? Answer choices were either bearish or bullish?

The results were surprising. For the 1st week voter results were 100% bearish. How could this be? Were all voters bearish? Were all readers of this blog bearish? Were blog readers in general bearish? Was it something else? (A statistician would call foul claiming a too small a small sample size that was not representative enough to draw any conclusion. I agree … but 100% bearish)? By February 28th, the results had settled at 2/3rd bearish 1/3rd bullish. It got me thinking …

To ‘Nudge’ … ‘to push mildly.

From my reading-in-progress pile, I pulled out the partially read book Nudge: Improving Decisions about Health, Wealth, and Happiness by behavioural economist Richard Thaler. Nudge talks about how decisions can be influenced by the placement of words, the way a question is asked, subtle changes in context. Small and apparently insignificant details can have major impact on [investor] behaviour. In many cases, the power of these small details comes from focusing the attention of [investors] in a particular direction. Was the Poll question and were the Poll answers on this blog perhaps affected, even tainted, by context?

On Feb 28, 2013, I changed the Poll. I then asked: “Are you bullish or bearish”? Answer choices were either bullish or bearish. (See the difference)? During March the voting result was the opposite. 2/3rd bullish. 1/3rd bearish.

Again, it would be naïve to draw any conclusions … I’m just saying … if investors can be influenced by some schmuck blog Poll …

According to the behavioural finance literature, Investor decisions can be influenced by the smallest change in context. Further, investor decisions are often based on emotion over logic. And that’s bad.

A bit of a stretch to get here, but … Right now investors are being nudged toward yield. (A Hunt for yield search produces 1.9 million results). Anything with a yield. Even the smallest yield. High yield bonds, Emerging Market bonds, REITs, Dividends, Alternatives. Small yields. Unknown risks. This is short-term, one-sided thinking. Short-term because yield’s today are tiny and temporary (and don’t contribute enough to achieving longer-term objectives). One-sided because there is no yield without risk.

Investors have been buying yield for at least four years running. The space is crowded. Is yield overbought? William Bernstein writes in Investing for Adults, that when a risky asset class becomes too popular, investors can expect low returns going forward. When everyone knows about it, it doesn’t work anymore. High yield bonds, for example. They are labelled below investment grade for a reason. Why do you think they’re called junk?

It’s a test of patience, but I’ll wait in short-term bonds (I use iShares XSB) for the return of volatility or for a correction before adding more yield.


Next time? More Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
2 Comments Post a comment
  1. Great experiment Doug! I just have one question…

    Do you want to sell me all the stocks you own at a P/E ratio of 5?
    __ YES
    __ no


    April 2, 2013
    • LOL! If you change the question around a bit to read ‘Do you want to buy all the stocks I own at a P/E of 5?’ … you’ll get a very different response.


      April 3, 2013

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