Stock Newsletters and Broad Market Appeal

Wall Street has a certain allure about it. This is personified in the media with such programming as “fast money” and “mad money” and in movies and streaming shows such as “The Wolf of Wall Street” and “Billions”. Perceived as a place where one can quickly amass fortunes and live out one’s dreams, there has been an exponential rise in paid-for research and stock-picking newsletters.

This type of priming attempts to add credibility to the narrative by triggering an emotional response from potential customers. It sets the stage for financial services that are less about learning financial acumen but geared towards stimulating behavioral biases for the purpose of profit. This essay will discuss the various methods used to implement broad market appeal for investment newsletters from the viewpoint of a behavioral psychologist. There will be a follow-up discussion on the ethics of such practices.

Priming, Credibility, and Emotion

When creating a product or service with broad marketing appeal, in this case investment newsletters, one needs to harness the priming that goes with the industry. Priming can be subtle cues within a profession that can have a significant effect on behavior and decision-making (Kahneman, 2011). Within the financial services industry, the idea of “getting rich quick” is the myth that has become reality. The notion is further confirmed through media and entertainment adding credibility to the perception.

There is an emotional aspect towards marketing investment newsletters. The creators of the marketing for these services take a peripheral route of persuasion when targeting their audience (Petty & Cacioppo, 1994). The marketing behind the investment newsletter directly addressed the potential money that one can make, but what it is really selling is a lifestyle that money can achieve.

Framing

When selling an investment newsletter, it is framed in a way that steers potential customer perceptions. When advertising that 30% of one’s stock ideas have outperformed a general benchmark return in the past year, it steers the reader towards the winning outcomes of the strategy. The message is much more effective than stating that 70% of the investment ideas performed at or below the general benchmark returns.

Additionally, this type of framing will activate what is known as outcome bias. Outcome bias refers to the tendency of an individual to overweight the importance of key datapoint, in this case annual returns, based upon the outcome of the most recent returns (Pompian & Pompian, 2012).

Reference Points and Illusion of Truth

When creating an investment newsletter for broad market appeal, one need to set specific reference points and the illusion that the potential customer is getting something unique to them. One attempt to set the proper reference point when attempting broad market appeal is to recommend stocks that are low in price. According to Birru & Wang (2016), investors systematically place an inordinate amount of emphasis on stock price when forming return expectations.

It had been shown that investors tend to believe that low-priced stocks have more room to grow that higher-priced stocks, regardless of the underlying fundamentals behind the company. This can be seen with the exponential rise of “penny-stock” newsletters, even though it has been proven that these types of investments typically underperform the general market.

The following is a recent example of a message that was distributed via Twitter.

This is a key example of illusion of truth (or control). The author of this statement states that all one needs to do is return 1% per week for 13 years to grow one’s assets to over $7 million. He then goes on, in a cryptic manner to describe how that is possible. Many investors have had the good fortune to return 1% in a week, thus the notion is plausible.

That said, any experienced investor knows that returning 1% per week for 13 years is an impossibility. What this message is insinuating is that, somehow, this individual has discovered a way to do so. The purpose of the statement is to provide a sense uniqueness to this individuals investment style that taps into potential client’s illusion of truth bias.

Ethics of Messaging

The original intent of this week’s written assignment was to design a broad market appeal to promote an existing product/service. This essay provides many steps towards marketing an investment newsletter to do just that. To deviate slightly from this intent, the higher objective here is to highlight how the choice architects behind this form of nudging goes against the true definition of Libertarian Paternalism (Thaler & Sunstein, 2008). The intent behind many of these so-called investment newsletters is to deceive. This essay should be used as a form of awareness.

Joseph S. Kalinowski, CFA

References

Birru, J., & Wang, B. (2016, November 01). Nominal Price Illusion (Digest Summary). Retrieved October 11, 2020, from https://www.cfainstitute.org/en/research/cfa-digest/2016/11/nominal-price-illusion-digest-summary

Kahneman, D. (2011). Thinking, Fast and Slow. New York, NY: Farrar, Straus and Giroux

Petty, R. E., & Cacioppo, J. T. (1994). The effects of involvement responses to argument quantity and quality: Central and peripheral routes to persuasion. In T. F. Pettijohn (Ed.) Sources: Notable selections in social psychology (pp. 121 - 128). Guilford, CT: The Dushkin Publishing Group.

Pompian, M., & Pompian, M. M. (2012). Behavioral finance and wealth management: how to build optimal portfolios that account for investor biases (2nd ed.). John Wiley & Sons.

Thaler, R. H., &; Sunstein, C. R. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven: Yale University Press.