Have you ever thought about how different cognitive biases and errors might affect your investor relations efforts?

The impacts can be far-reaching, touching your communications and interactions with investors. Beyond the hyper self-aware and informed, these biases work silently in the background, influencing our daily decisions and interactions. 

I recently read the book “The Art of Thinking Clearly” by Rolf Dobelli. He did a fantastic job covering many biases, errors, and cognitive issues while giving real-world examples for how to best understand and navigate them. 

The book builds on many others’ works, like Daniel Kahneman’s book “Thinking, Fast and Slow”, and all the researchers around the world studying psychology and behavioural economics.

I’m using Rolf’s work as a reference and inspiration. In this newsletter issue, we explore components of his list and dive into how to think about some of them through an investor relations lens.

Survivorship bias is well-known, particularly in investing. With Canadian microcaps, it can distort your perception of the probability that your investor relations efforts will be successful.

Many successful microcaps have robust capital markets engagement efforts, and you may mistake these activities are an absolute requirement to becoming successful too. 

However, what you don’t see is all the companies with weak fundamentals who couldn’t afford to spend significant amounts on IR. Or issuers who overspent on IR and stock promotion became reliant on selling stock and never developed a real business.

Many of these microcaps are no longer around…

I am an advocate of cutting your losses quickly. Like many aspects of business and life, certain parts of your investor relations efforts may not work as you initially hoped.

Firstly, it starts with being intellectually honest with yourself in knowing when something isn’t progressing and unlikely to improve.

Secondly, you can also try and reduce this risk with different measures for your IR program. For example:

Most importantly, I believe there are diminishing returns on IR spend past a certain level for Canadian microcaps. Therefore, it is important to find the appropriate balance for the size of your business and its underlying fundamentals.

Humans are inherently driven by stories, which help us understand context, cut through uncertainty, and explain events. We want to see the world as coherent.

For a microcap’s investor relations program, I believe understanding the power and structure of a story is a key part of the overall communications.

Investors will be looking at how you pitch the company, its history, how you explain developments, etc. These could involve one main and several sub-stories to help people digest the nuances and drivers of change.

You must be careful, as the risk with story bias is coming up with oversimplified conclusions on causality.

According to Rolf, hindsight bias “is the most prevailing fallacy of all”. He aptly describes it as the “I told you so” phenomenon.

In my opinion, microcap investor relations is more of an art than a science. There are many factors you do not control, and it may be easy to draw causation after the fact. As Rolf explains further, this leads us to be “better predictors than we actually are”.

The solution to this is accepting you don’t have all the answers and to avoid taking excessive risks because of your ego.

Management teams often face new and uncertain circumstances and feel the need to do something. They may lay out the different options, pathways, and responses for an event that occurred and map that to investor communications and outreach.

However, action bias explains how, in these developing situations, we feel compelled to immediately do something. This could be to the detriment of long-term investor trust and credibility by acting too fast and frequently.

Sometimes the best thing to do is nothing. Sometimes it helps to let cooler heads prevail and wait it out before deciding.

There are different ways of communicating the same facts, which is where framing comes in. Even subtle differences can lead to significantly variable perceptions and results. 

An example from Rolf’s book: “Researchers presented a group of people with two kinds of meat, “99 percent fat free” and “1 percent fat,” and asked them to choose which was healthier. Can you guess which they picked? Bingo: Respondents ranked the first type of meat as healthier, even though both were identical.”

Another term called “glossing” is another type of framing and builds on it further.

Rolf gives some great examples of what we see in the microcap world: “Under its rules, a tumbling share price becomes a “correction.” An overpaid acquisition price is branded “goodwill.” In every management course, a problem magically transforms into an “opportunity” or a “challenge.”

At the end of the day, there is only so much lipstick you can put on a pig.

You have to be mindful of what you say about situations, particularly negative ones, as investors can see past it and it’ll impact their trust.

First, I love the name of this one. Rolf explains Twaddle Tendency as: “reams of words are used to disguise intellectual laziness, stupidity, or underdeveloped ideas.”

We can build on this further with one of his examples, commonly seen among management teams. Rolf continues explaining that: “The worse off a company is, the greater the talk of the CEO. The extra chatter extends to not just a lot of talking, but to hyperactivity also designed to mask the hardship.”

In this issue, we selected a handful of the 99 different biases, fallacies, and cognitive errors Rolf Dobelli explored. I encourage you to read the book in its entirety to not only inform you about your investor relations efforts, but also its applicability to life.

Understanding and addressing cognitive biases isn’t just an academic exercise - it’s essential for stronger investor relations and better business decisions.

In this issue, we selected a handful of the 99 different biases, fallacies, and cognitive errors Rolf Dobelli explored. I encourage you to read the book entirely to inform you about your investor relations efforts and their applicability to life.

Below are the latest announcements of investor relations and promotion agreements by Canadian listed companies (TSX-V, CSE, and NEO).

Although each contract varies, I have highlighted the cash component of the disclosed agreements and provided the monthly equivalent if the agreement covers a longer specified period. It also does not include any stock-based compensation, such as options.

⁽¹⁾Amounts have been converted to Canadian Dollars, and if applicable, do not include stock-based compensation.

Legal Disclosure 

This newsletter is provided solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy any securities. The information contained herein should not be construed as legal, tax, investment, or financial advice. It is imperative to understand that some of the companies mentioned may be retained investor relations clients of Panolia Investor Relations Inc. Readers are strongly encouraged to perform their own due diligence and consult a registered advisor or broker-dealer before making any investment decisions.