CFA Conference Recap: Why Do We Resist Change?

Recently, the Narwhal team was able to stream the 2021 CFA Institutes conference. This conference was a day long event centered around the current themes, trends, and best practices within the wealth management industry. The entirety of the conference provided meaningful insight into how best to operate a wealth management practice, but the information that I found most impactful was presented by the conference’s keynote speaker, Michael Mauboussin. Mauboussin has a long history in the world of investment management that includes time at Credit Suisse, BlueMountain Capital, and Morgan Stanley. He is also a successful author producing a number of works on the topic of investing.

Mauboussin’s presentation was centered around the idea of innovation and why it is often so difficult for us as human beings to embrace change. An obvious sports fanatic, Mauboussin framed his presentation with the example of the three-point shot in basketball to demonstrate our reluctance to accept innovation. The three-point line was instituted in the NBA in 1979, and for years the idea of a long distance shot that generated an extra point per made basket was thought of as a gimmick. Now, however, this shot has become the foundation of the modern NBA and has led many teams (like the Warriors) to consistent success. So why were players and teams so slow to adopt this strategy initially, a strategy that proved to be consistently effective? And why can the same so often be said about new ideas and innovation in so many other industries? Mauboussin explained the innate characteristics that we all share that make us reluctant to embrace change in order that we might be aware of these predispositions and avoid missing opportunities to innovate.

Mauboussin said that all of us are influenced by something called status quo bias. This idea states that we naturally favor things the way that they have always been. It’s not an uncommon thing for people to proclaim that they are afraid of or resistant to change, but this is more than an individual’s personality trait, it is a deep down phycological leaning that most of us naturally favor. He cited two specific reasons why we tend to align in favor of the status quo.

One of the driving principles of our resistance to change is the idea of loss aversion. Loss aversion states that people are disproportionately concerned with potential losses compared to potential gains. Our natural inclination is to focus on all the things that could go wrong and ignore all the things that could go right. Not only that, but we experience a more profound response when something negative happens compared to something positive, even if the magnitude is equal. For instance, an investor might be happy when he or she opens their account and sees its value has increased by 1%, but the level of emotion the investor feels when they open their account and see that it is down 1% is much more intense, even though the values are equal. Losses always sting to a higher degree than wins satisfy. Because of the added sting, losses tend to stick out in our minds much more than wins. This idea of being overly focused on the negative events that could or have taken place influences the way we view change. Why would we look forward to a change in the status quo if all we can think about are the hundreds of things that could go wrong and the pain that would result from those mishaps?

Another idea that Mauboussin discussed that I found particularly fascinating (and dangerous) was the idea that we are naturally less critical of a failure brought about by inaction than we are of the same failure that results from action. This idea, much like loss aversion, proves to be a driving factor in why most people struggle to attempt change. To give an example of this idea, I will steal a page out of the speaker’s book and reference a trend in basketball. In basketball, there is a perception that has been created around the act of getting dunked on. Somehow, in our culture, we have convinced ourselves that it is better to let an offensive player go freely to the basket than it is to attempt to contest a dunk, for the fear of the ridicule that would follow if the defender were to get dunked on. Both baskets count the same, they are two points regardless of whether or not the play ends up on a highlight reel, but one at least gives the defense a chance to stop the offense, the other doesn’t. Still, we tend to pour less ridicule on the player who steps aside than we do on the one that gets dunked on. This idea of inaction somehow being more acceptable is especially powerful when examining someone in a leadership role. So often, leaders that “don’t rock the boat” and fail to adapt are viewed more favorably than those that attempt to make an improvement and fail just the same. We as observers naturally side with the leader that did nothing because there isn’t an action linking the person directly to the failure. This idea is common throughout our culture and proves to be another deterrent in our willingness to embrace the change brought about by innovation.

While it is difficult to fight tendencies that are so deeply ingrained, Mauboussin offered a few quick thoughts on how to help encourage change and innovation, especially from a leadership standpoint. The first method offered to help encourage change was to ensure that you as the leader don’t only explain what is changing, but also why that change needs to occur. The “because I said so” mentality is a broken model, and if change is going to be accepted, buy in from those going through the change is critical. Explaining the why behind the change helps cultivate that trust and buy-in that is so important when it comes to successfully instituting change. A second tip offered by the speaker was that, while explaining the why, never rely solely on statistics. There are undoubtably some that prefer to see a picture through numbers, and numbers are certainly a necessary aspect of any decision, but the vast majority of us are better convinced when we are told a story. Mauboussin repeated the idea that, when presented with stories and statistics, the story always controls the day. This is evident in our culture today. Often headlines catch our attention and influence us more than statistical data, for better or for worse, which is reasonable given that the narrative a headline is painting is easier for us to understand and relate to than numbers alone. Understanding the influence that qualitative data can have on an audience is important to consider when trying to drive home the value of potential change and reduce some of the worry that comes with it.

All told, the keynote speech was a great reminder of natural biases that we all need to be aware of in order to avoid missing opportunities to innovate. Michael Mauboussin has a number of books on this subject and investing as a whole that are worth investigating if the concepts discussed are interesting to you.