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Chapter 1: What story do investors tell themselves about their investments?
We want something about the story we are telling ourselves or the analysts or the market are telling us about it to be true. We want it to be true. And that will guide our view, our outlook on the company over the long term. Sometimes that story will overwhelm what we see or observe in the data. So the number one In life, feelings and facts are both very important, but a feeling is not a fact.
That was Harvard-trained behavioral scientist Julia Darr, author of How Change Really Works. I'm Motley Fool analyst Rachel Warren. Julia joined me to dig into what decades of behavioral research can teach us about picking better stocks, why the stories we tell ourselves about companies can be more dangerous than bad data, and how to read a leadership team's body language from the outside.
We hope you enjoy. I'm Motley Fool analyst Rachel Warren, and today I'm excited to welcome Julia Dard to the show. Julia is a Harvard-trained behavioral scientist and managing director at Boston Consulting Group, where she founded and leads the group's behavioral science lab. She has spent more than a decade applying experimental behavioral science, starting from psychology, economics,
and neuroscience to large-scale organizational change. She's advising CEOs and leadership teams across a wide range of industries and countries.
Chapter 2: How can behavioral science improve investment decisions?
Her TED Talks on productive disagreement and constructive conversations have been viewed more than 8.5 million times on the web. She's a Forbes columnist who's written for the Financial Times and Harvard Business Review. She's also co-author of the new book, How Change Really Works. arguing that the most important component to change that sticks is behavioral science. Julia, welcome to the show.
Thank you for having me, Rachel. So excited to talk with you today. And one of the things that's so, I think, fascinating about the space you work in, it's obviously applicable to so many different areas of life, but particularly as well to the world of investing, right? And many investors look for an edge in data, but I don't think that we often look for it in human behavior.
You've worked for over a decade at the intersection of neuroscience and economics. So maybe just to start off today, what is behavioral bias and how and why is behavioral science maybe a more reliable indicator of a company's future than just traditional metrics?
Behavioral science focuses on basically why do people do what they do and what are effective strategies and tactics for changing behavior in predictable directions. That could be my own behavior. How do I adopt new habits? It could be the behavior of a group, for example.
Chapter 3: What are the common behavioral biases affecting investors?
How do we get consistently better quality decisions, for example, from an investment team or from a fund manager? It could be all the way at a whole of society level, how do we get better cooperation in our communities and that kind of thing.
One of the reasons why this combined body of psychology, economics, neuroscience, marketing is so important is human beings sometimes find it difficult to do all of the things that we hoped to do, that all the things that would make us the best version of ourselves, we find it hard to follow through on the things that we committed to do or that we want to do.
And the other reason, especially for economists, that this whole body of research is so interesting, is so important, is that for a long time, we assumed, that is, economists assumed, that human beings were rational creatures. utility maximizing, it would say we're able to take in all of the information that was presented to us and make a really good quality decision as a result.
That's the whole basis of rational market economics. And that turns out not to be true and is now very well established not to be a comprehensive explanation of human behavior. And the thing that I love is an awful lot of what we talk about as behavioral biases actually reveal really delightful things about human beings.
They show that we are much more generous, patient, kinder, altruistic than rationality would expect. Of course, it also reveals that sometimes we are more impulsive, less deliberate, more self-focused than would also be ideal for us.
And so the whole mission of people like myself trying to bring behavioral science into the real world is actually to make it useful for people to say, you have a set of goals and you have a set of visions for your life. You have a set of expectations for your team. How do we make it more predictable, more likely that those can be a reality?
Well, and I think it's a really interesting definition as well of just how it works.
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Chapter 4: Why do most corporate transformations fail?
And I think it's important for our audience to understand. But how can we leverage behavioral science to when we're looking at a company's growth story, we're trying to see whether that is perhaps a good investment for our portfolio, a business we follow.
How can we leverage some of these elements of behavioral science to maybe see what is a better indicator of a company's future growth story than, say, just financial metrics? Or are there very common behavioral biases that adversely or positively impact investing decisions that we should know of?
Let's talk first about our own behavior. It's delightful to try and change other people, but perhaps the most predictable person that we can change is ourself. I know it's much more annoying to try and change yourself. You've got to work with where you are. And so the reason I say that is let's talk first about our own behavior, but then also about the behavior inside companies and organizations.
So there are two really big challenges or opportunities that we have in our own investing behavior. And one is a tendency that we have when we have a belief or an expectation or a hope in our mind. which, let's be honest, very often is how we start out making an individual investment choice or to continue to buy or sell an individual stock.
We want something about the story we are telling ourselves or the analysts or the market are telling us about it to be true. We want it to be true. And that will guide our view, our outlook on the company over the long term.
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Chapter 5: How can investors identify false alignment in leadership teams?
Sometimes that story will overwhelm what we see or observe in the data. So the number one lesson is to say, in life, feelings and facts are both very important. But a feeling is not a fact.
And being able to untangle the difference between a feeling that I have, something that I hope is true, and facts that are being placed in front of me is perhaps the most valuable skill any of us could learn in all of investing. The second, of course, which I imagine that your investors already spend a good amount of time thinking about is just to be patient.
There are enormous returns on patience in a lot of life, but surely in investing as well. And so being able to be a good enough judge of whether you're investing over the appropriate time horizon for you, but also for the company. I try to say to myself, we are always in the middle of the story.
Even if today is your first day as an investor, no matter what, we are always in the middle of the story. Now, for companies, I think it's completely different. One of the things that we know for sure now, we now have 50 years of data, is that the return on transformation or big change efforts inside companies are actually pretty disappointing.
They really consistently, those efforts where an organization says we're undertaking a really large transformation, sometimes it could be something like a merger or an integration of another company, unsuccessful much more often than they're successful. They fail about 60 to 75% of the time.
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Chapter 6: What are the three types of change stories in organizations?
the rate of improvement on that is not really changing over the last 50 years, even though we know more and more about how to effectively run a company. Why is that? Because companies, leadership teams, investor communities are composed of humans, and getting people to do a big thing together is difficult.
However, and this is why I think it is so important for people who follow a stock, who are investors in companies, to pay attention to this human element. It's not that no change efforts ever succeed. Plenty of them do succeed, and it's not random.
One of the things that we, through a really significant body of research on company transformations and on human behavior itself, find is that the companies that consistently pay attention to the ways in which the behavior inside the organization needs to change and makes it easy to do the things that they have announced that they are going to do are much more likely to be successful.
Of course, we should pay attention to what companies say, their stated plans and intentions and strategies, and we should pay at least as much attention to what they do, what the follow-through on that quarter over quarter is.
It's really interesting to think about the ways in which just kind of the field of behavioral science, as you've explained, applies to this idea of very large scale organizational change, which is something you have extensive expertise in.
So given all that you've said about really the success and failure rates of organizational change, you know, when you're looking at a business, is there change readiness or adaptability, if you will? Is that a positive perspective? predictor of their growth story? Is that something that can actually be a bit of a detractor from the growth story overall?
It's clearly true that there are moments where a company or an individual leadership team is better or worse at changing.
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Chapter 7: How can investors spot the gap between promises and actual results?
I think the number one thing, and this is, of course, much easier to see if you're inside a company, if you're spending a lot of time with the leadership team, but I think you can discern it from the outside as well, is change. Does the leadership team, the CEO and the board, are they expressing true agreement on what the future direction of the company is? Or do we have a false alignment?
And so let me give you a really small illustration of this in our own life. Have you ever been in a meeting and where towards the end of the meeting, someone very senior says, well, okay, are we all aligned? And there's sort of a longish pause. It seems pretty clear that the only answer is to say yes, even though there's clearly an undercurrent of many questions left. That's false alignment.
where we might even have a rough view of the direction, but it is not at all apparent that people inside the room have said, I know why we need to change. What are the economic and more competitive forces requiring us to change? I know what exactly we are going to do.
Beyond, for example, saying we will have an AI transformation, that's not a very good example of being specific about what type of change we have. And equally importantly, how we are going to change. What exactly people who work here in this company, the suppliers who serve us, the customers that we reach, how we expect their behavior to change.
Chapter 8: What principles of behavioral science can guide long-term investment strategies?
And so you can test that fairly well inside a company just by asking people what they think has been agreed to and checking if that is the same thing. I think you can also discern it from the outside. How clear is the strategy when different members of the leadership team speak about their strategy and intentions? Do they speak about them in approximately the same way?
Do they use the same choices of words? Do they explain the reasoning behind the decision in roughly the same way?
And equally importantly, and I think it would be wonderful if as an investor community, as an analyst community, when we have the opportunity to ask questions and get clarifications from leadership teams, we spend a good amount of time pressing people on the how of their announcements. How exactly will we make this shift? How will we know if you have been successful?
And continuing to follow up on that over a period of time. So it's not just that we get the early enthusiasm around an announcement, but we actually see whether that success yielded specific results.
Yeah, that really leads well into my next question, I think, Ibita. Every CEO claims the company is innovating, right? But sort of as you've highlighted, some fail to deliver. So when you're looking at that through a behavioral lens, are there ways that investors can sort of spot the gap between a flashy press release, so to speak, and actual innovation?
One right at the outset is innovation. Getting and hearing from companies, from leadership teams, what's the story underlying that innovation is or that stated innovation is incredibly important. So we argue that there are three basic types of stories of change in an organization. So there is a threat story, like we must change or we will die. There is a fitness story.
So we, as a company, have perhaps gotten a little bit loose in our processes, perhaps a little bit undisciplined in our capital planning, a little bit overconfident about how much customers or the market love us and we need to continuously, consistently develop a better set of habits in order to return profitability or increase profitability and to be worthy of investor trust.
First threat, then fitness. And the third is destiny. By making a set of choices and changes, we can become who this company was always meant to be, what we were always supposed to be creating together, really achieve our purpose. Now, there are two dilemmas that happen inside leadership teams.
One is trying to put all of those, threat, fitness, and destiny, all together into a single story and say, well, it's a bit of this and it's a bit of that, and also it's a little bit of destiny. What that leads to is a really muddled and confusing explanation, but it might also be a sign that the strategy is not very clear.
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