Posted by | 11/04/2011 | Articles, Direct Mail Marketing, Strategy

Prior to the financial collapse in 2009, there were a handful of bond traders buying insurance against subprime mortgages. These traders were buying insurance bonds that would payout if subprime mortgages fell into default (and by extension the housing market crashed). In other words, in a time when everyone was trying to make money off growth in the housing market and trading subprime loans like hockey cards in the school yard, these guys were laying major bets that there would be a spectacular failure*.

In hindsight, it seems like either genius or extreme luck. But in fact what lead these traders to ‘short’ the market lay, effectively, in the numbers. These traders looked carefully at key financial indicators, such as the default rates of individual mortgages, % of zero payment mortgages (yes they existed), mortgage fraud rates, and other factors that virtually guaranteed the subprime mortgage market was not sustainable. They quickly realized that it was a matter of when, not if, the subprime mortgage market would experience a colossal default.

Lessons Learned from Betting on the Crash

As you might imagine, these traders had a tough go trying to convince investors of what they were doing, despite their excellent investment records. Why? Because they were doing something that 1) People didn’t really understand and 2) Ran against the general consensus.

There are 2 key lessons marketers can take away from this fascinating case study:

1. Numbers can lead to useful and obvious insights that are counter-intuitive to prevailing wisdom.
2. No matter how strongly the numbers indicate a particular outcome, most people exhibit surprisingly little trust or belief in them.

Applying the Lessons of Subprime

To apply these lessons, think about how marketers use data. Consider, for example, a case where purchase patterns in transaction data reveal an insight that runs against the prevailing belief of the client – one that they may be heavily invested in, such as store design. Without the right context, the right story, the client may not either believe or understand how to use the insights correctly. No matter how obvious it seems they should turn right, people sometimes insist on turning left.

When a data insight seems obvious to us, the researcher, we sometimes rush to bring our findings to our clients. Direct marketing is fraught with this issue since it involves interpreting both historical data and real-time results. Direct, after all, is supposed to be measureable. But if during your analysis or measurement you discover something that runs against the prevailing train of thought, you might want to put some time into the story behind the insight before you try to turn the train.

Peter Gruber gives a great explanation of the importance of story in business here. In summary, he says it’s not about what the facts are, but how you push them across the table that determines whether or not people ‘buy into’ your idea.

Believers vs. Non-Believers

At the end of the day, there will believers and non believers. Ironically, solid research or measurement metrics may generate great insight, but few believers. A great story, on the other hand, has the best chance of creating believers of the same message. And believers are the key to connecting insights, to action, to results, since it’s typically the client or the investor who holds the cash.

Ideas, as they say, are a dime a dozen. Until, that is, the idea leads to an action that makes a million dimes. Focus on results and the actions needed to get you there. Count your dimes. Use story to get there.

Then place your bets.


*The financial case study information here is based on Michael Lewis’ “The Big Short”. For an excellent review and summary of the book, click here.