My latest non-marketing obsession is behavioral finance. Behavioral finance is a multidisciplinary subject that focuses on how and why investors make investment decisions.
As my knowledge of behavioral finance has deepened, so has my belief that performance marketers can benefit from studying the big ideas of behavioral finance.
Herding is one of the big ideas from behavioral finance that explains a sub-optimal decision marketers tend to make.
Herd behavior is common among investors and marketers
Banerjee (1992) defines herding as “everyone doing what everyone else is doing, even when their private information suggests doing something quite different.”
The tendency to follow the crowd when making investment decisions guarantees one outcome: you will not achieve alpha (i.e., superior returns).
The premise is simple: You cannot perform better than the crowd by following the crowd.
The same is true in performance marketing. To beat your competition, you need to do things they do not do.
Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus, your thinking has to be better than that of others — both more powerful and at a higher level. Since other investors may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others… which by definition means your thinking has to be different.— Howard Marks
When you follow the lead of your competitors—say, by developing ad creative that borrows from their ad creative—you are basing your decision-making on assumptions, not your own set of privately-held facts:
- My competition has information I do not. (Fact)
- The information my competition has is accurate / or derived from a proper analysis of their data. (Assumption)
- My competition’s marketing campaigns are cost effective. (Assumption)
- My competition’s definition of cost-effective is the same as mine. (Assumption)
- Their ad creative is the reason their marketing campaigns are cost-effective. (Assumption)
- By doing what they’re doing, my creative will also elicit a desired response from my target audience. I.e., my audience will respond the same way their audience responds. (Assumption)
Mimicking the herd invites regression to the mean.Charlie Munger
This isn’t to say that every time you follow the crowd, bad things happen. If that was the case, then you shouldn’t advertise on Facebook or Google. Matter of fact, you shouldn’t even advertise because everyone does that.
But for many marketing decisions you inevitably have to make, choosing to do what your competitors do ensures you will not do better than them.
We are in the business of beating our clients competitors. There is no one-way to do this, but imitating their competitors ensure we will not achieve our objective.
Follow our lead on this…