Routinely, we are asked by financial advisors to provide specific examples for the various behavioral biases. On October 19th, we witnessed a textbook case of a behavioral bias we call “Herd Following”. Here’s the story of how $700 million was generated out of thin air by the oracle of Chicago that knew her herd would follow.
Herd Follower (noun): someone who has a tendency to stampede into investments with exuberance and sell out of fear (with a crowd of likeminded people).
On Monday, October 19th, it was announced that Oprah Winfrey was investing $46 Million (a 10% stake) in Weight Watchers International, Inc (WTW). The news of this investment sparked investors to follow driving the stock price up 105% to close at $13.92.
If Oprah jumped off of a cliff, would your clients follow?
If Oprah jumped off a cliff, would your clients follow? If you had any clients ask about Weight Watchers, then yes. Yes, they would follow. At the opening bell on October 19th, WTW opened at $6.78 and the analyst reports were grim. At the announcement of Oprah’s investment, the trading volume of the stock rose 61x its normal rate. This generated $700 million in value for Weight Watcher shareholders, but industry analysts are predicting this is only short term success. This is a textbook case of herd following, an instinctual behavioral bias that influences clients to make irrational decisions.
The breaking news of Oprah’s investment allowed investors to forget:
- The company’s stock had lost nearly 73% of its value in 2015.
- A recent Duke University study found that Weight Watcher members lose only an average of 5 pounds at a cost of $377 per year.
- Sales have declined for seven quarters with executives blaming the popularity of new free apps from competitors such like MyFitnessPal which beat Weight Watchers are usability and price.
- There is no clear direction for the future of the program.
Stopping your clients from jumping:
I would bet my money (and that’s saying a lot because I am a saver) on the fact that your clients that are herd following Oprah are also extraverts. Just like these same clients want to keep up with the Jones’ they also don’t want to miss out on a train that is leaving the station (especially not the Oprah Train). As you are dealing with your client, remember that extraverted clients like verbal, (in-person conversations) because this how they learn and how they are most comfortable.
- Call your client and invite them to lunch or to the office to learn (if you need to, tell them Oprah will be there kidding).
- Tip: Have your extraverted client bring a friend. They are excellent networkers and would love learning about the market with friends or family.
- Explain what the Jones’ are doing and how your client can get on board.
- Leave the industry reports behind: Don’t drown your client’s in paperwork. Keep the conversation light at first and make the conversation fun and exciting with lots of animation.
Want a more intuitive and predictable approach to manage your client’s emotions? Try Financial DNA and ask your sales consultant about the Financial DNA Behavioral Management Guide.