Diligence Trappings of Lawn Sign Decisions
Regardless of where any of us stand on a political spectrum, there is a superbly valuable due diligence lesson for investment teams that derives from the behavioral sciences of psychology and politics. There is a dangerous trap that we refer to as the lawn sign decision.
In the US a long-standing tradition of the two dominant political parties is the wide-scale distribution of the “lawn-sign” (that placard that you stick on your front lawn or in the window of your apartment or townhouse that promotes a candidate). The secret behind this practice is that yes, it is effective, but it has little to do with enrolling supporters to influence neighbors. The real trick of the lawn sign is that it locks in the vote – i.e., it will early on lock in the person who plants the sign on his or her front lawn.
In contrast with the lawn sign, civics promotes the sanctity of keeping your vote private, and it’s not just about mitigating the incidence of voter intimidation. The voting booth privacy curtain also promotes the idea that until that final moment of truth the voter has the opportunity to delay and truly reconsider views. The ethic: avoid making decisions with insufficient or inferior data. Keep an open mind, collect evidence, evaluate risks and opportunities, and only make that final “bid” at the end and, most critically, without having to defend your position to your peers (or neighbors).
Being social creatures, once we take a position in a public forum (including casual discussions with our peers and inside the investment committee or boardroom) we have a tendency to filter all new information through a lens that is now locked in for bias. We try to convince ourselves that we will remain open-minded (and we certainly say so), but it’s much more difficult than that. Nature kicks in – and we zero in on the target once we pick it. It is human nature to strive to retain our standing in our community and – in the context of strategic evaluation and deal decision-making in a group – that often translates into maintaining the integrity of the positions we took early on.
Investment hypotheses can drive focus, but there is a dangerous, slippery slope between hypotheses, forming and defending early views, and reaching opinions (sometimes without consideration of the best fact base).
Our recommended fix:
- Initiate diligence early and build in sufficient time for great evidence-based work
- Resist the temptation to ask your diligence team and external partners for early views
- When you see a lawn sign getting planted, make it a point (and pull it out of the ground). Help everyone understand that taking a position too soon represents an unnecessary risk. Push for a culture that draws conclusions from evidence, instead of presumptions, experience or logic alone. This will pay off
- Finally, acknowledge and celebrate when someone on the team changes his or her view based on greater evidence. These are important wins, and should serve as your standard of excellence
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