What’s the Real Cost of Choosing Wrong?
It’s a powerful question that is universally applicable in business and life.
If you look back in history, you’ll discover that business pioneers of the past discovered “pure gold” marketing techniques that are seldom in use today because everyone is too busy chasing upstream value while the real gold is hidden from plain sight.
Consider the story of Jack Bogle – the founder and chief executive of The Vanguard Group.
In 1975, as a 46-year-old fund manager, Bogle did something that Wall Street called “un-American.”
He launched the first retail index fund…
…and was immediately ridiculed by Wall Street pundits.
Bogle’s start was rough – his fund’s initial public offering was arguably the worst underwriting in Wall Street history. Bogle hoped to raise between $50 million and $150 million, but raised only $11 million – not even enough capital to buy every stock in the S&P 500 index he was trying to replicate.
The head of Fidelity, then among the fund industry’s largest asset managers, mocked him publicly: “I can’t believe that the great mass of investors are going to be satisfied with just receiving average returns. The name of the game is to be the best.”
Critics dubbed it “Bogle’s Folly.”
But here’s what Wall Street didn’t want you to know:
Bogle wasn’t selling “average returns.”
He was exposing the invisible tax that professional money managers had been extracting for decades and systematically making it impossible to choose anyone else.
The Hidden Opportunity Excavation Strategy
Bogle was a contrarian – he wasn’t interested in conforming with the status quo and “how everyone else on Wall Street” did things, his approach was different.
And this is how all breakthroughs in business are born – thinking differently about the business you’re in.
Bogle didn’t focus on the “performance and potential returns” of his funds – nor did he promise to “beat the market.”
Instead, he educated investors about the hidden costs they were already paying…
…costs that Wall Street had carefully kept out of sight.
First, he revealed the intermediaries:
As Bogle explained to investors:
“The investor sits at the bottom of the food chain of investing. Everybody else gets paid before you do. You have a residual claim.”
Marketers and business leaders…think long and hard about that framing for a moment…
…and let it sink in…
…you’re not in the “here’s why we’re better business” …
…you’re in the “here’s the hidden opportunity, underutilized, and underleveraged” assets that already exist in your world” business…
…or as Bogle would put it, “here’s who’s already taking your money before you even see your returns.”
In another genius reframing move, Bogle created a gambling metaphor that added more context and insight, saying:
“…because of those croupiers in the middle: the Wall Street investment bankers, the brokerage firms, the mutual fund money managers, the deal makers, the attorneys…everybody. The accountants…everybody who is subtracting value from the investment food chain.”
Notice how Bogle created an “us versus them” adversary – a bridge that investors and Bogle could cross together to get to financial freedom and independence.
He wasn’t making vague accusations. He was systematically eliminating his market competitors one by one and creating a movement in the process.
The Hidden Opportunity: Quantified
Bogle didn’t stop at calling out the “hidden tax” offenders on Wall Street – he took it a step further and quantified it, saying:
“…the all-inclusive cost of using mutual funds can be several times larger than the expense ratio they report.” His research revealed total costs reaching 4.22% per year when accounting for expense ratios, transaction costs, cash drag, tax costs, sales charges, and counterproductive investor behavior.
A hidden 4.22% tax annually…compounded over decades…on every dollar you invest.
BOOM! That’s PURE GOLD.
Bogle’s real genius was in how he positioned his firm in the marketplace in a way that “owned a unique position in the consumer’s mind.”
As Bogle said: “The real market folly is to attempt to pick actively managed mutual funds and expect their performance to beat a low-cost index fund over a long period of time, especially after accounting for active-management fees.”
Alas, Bogle passed in 2019, his legacy endures. Below are just a few highlights of his accomplishments:
- By the time of his passing in 2019, the Vanguard 500 Index Fund had become one of the world’s two largest mutual funds.
- Vanguard now manages over $8 trillion in assets.
- Today, nearly every dollar invested in America goes to either Vanguard funds or Vanguard-influenced funds.
- The “great cost migration” movement that Bogle started has saved average investors trillions of dollars.
And if Bogle ever needed further market validation, consider what none other than Warren Buffett said himself:
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.”
Positioning: How to Find Hidden Opportunities
Bogle’s story is a case study in market positioning…
…he found a “hole in the market” and positioned his firm accordingly.
So, let’s revisit the original trillion-dollar question:
What’s the real cost of choosing wrong?
The fact is, there are invisible risks in every choice you make.
And if you’re able to frame these invisible risks and position yourself in the market as the “only logical choice” to uncover these hidden risks, you’ll have a competitive advantage in the market.
The lesson is monumental for the business and marketing world alike – find the hidden ugly truths that your market/prospects don’t even know exist, expose them in full light, reveal the true cost, and when you do so, you’ll be the only logical choice in the market.
So, why does the business and marketing world always get this wrong?
Because they “think” about the “value exchange” differently – it’s all “manufactured and above surface,” when the real treasure is hidden out of sight, underground.
They obsess over the performance and potential of value creation, not realizing the biggest value already exists – the hidden costs they’re already paying for, and most importantly…
…the hidden opportunity costs of unrealized future gains.
It’s true – people generally value potential losses more than gains…
…it’s why your prospects fear losing $500 MORE than they love gaining $500.
Case in point, back in 1979, psychologists Daniel Kahneman and Amos Tversky ran an experiment to prove it: they gave participants hypothetical scenarios involving gains and losses of equal amounts, and the results were surprising…
…people consistently felt losses about 2.5 times more intensely than equivalent gains.
This core discovery, a concept known as loss aversion, eventually won Kahneman the Nobel Prize in Economics in 2002.
The key takeaways of the experiment were presented in their paper, “Prospect Theory: An Analysis of Decision under Risk.” Here are a few things that they found:
- Losses are felt more negatively and intensely than positive emotions from a gain of equal worth.
- This new “Prospect Theory” shattered the existing paradigm and belief that “people are perfectly rational” and evaluate outcomes in “absolute terms.”
- People are generally risk-averse when considering potential gains but become risk-seeking when facing potential losses.
The concept of loss aversion is a powerful way to “frame” the choices our customers face because it can dramatically alter decisions.
It all goes back to the way human brains are wired…for survival.
As Harvard psychologist Daniel Gilbert states:
“Our brains evolved to make us survive, not to make us happy or rational.”
For positioning and framing, remember – that losses are worse than wins.
But let’s continue our journey so we can find more PURE GOLD.
Relative Value: The Endowment Effect
The endowment effect is an emotional bias that causes individuals to value something they own higher, often irrationally, than its market value.
It’s a subjective way of perceiving value.
The implications of this effect are profound because it means that when people simply own an item, even for a very short amount of time, they will subjectively value it higher than a buyer might be willing to pay.
The endowment effect is related to loss aversion, as people feel the pain of losing something they possess stronger than the pleasure of gaining the same thing.
Because when someone feels a sense of ownership, it’s much harder for them to give it up – they are psychologically invested.
Look around and you’ll find plenty of examples of the endowment effect in motion.
A prime example of this is found in the real estate market – where home sellers typically always think their home is worth more than comparable homes because it’s “their home.”
Why this matters to the business world:
- It creates market inefficiencies. Distorting the natural flow of goods because of misaligned subjective value biases.
- It magnifies the loss aversion phenomenon.
“But, Warren, I thought you were leading us to the PURE GOLD treasure. What does all this mean, and where do I find the hidden business opportunity?” you ask.
Hold on, I’m getting there.
But first, so I can tie these two related concepts together:
Loss aversion and endowment effects are about what your business prospects can SEE (once you show them), but there is a 3rd dimension to this that makes the TRUE GOLD opportunity much bigger…
…it’s called opportunity cost.
This 3rd dimension is exponentially more painful when you’re able to show your business prospects what the financial and/or other implications are if they had made the right choice to begin with (in the context of the timeframe).
To reframe this – while most in the business world (pay attention marketers) try to manufacture perceived value “above ground” where every (feature, benefit, bonus, discount, etc.) is visible and in plain sight…
…sophisticated marketers will excavate hidden opportunities (digging below the surface to reveal what’s already being lost $$$ via the invisible tax.
But wait, there’s more!
Business historians who’ve been paying close attention and became masterful strategic advisors won’t stop there; they’ll further excavate, but in a non-linear way so they can leverage the hidden opportunity and find MORE GOLD.
This is where the magic happens because opportunity cost is the cruelest invisible tax of them all because it’s irrecoverable.
Let’s summarize it this way:
- Loss Aversion: First, make the current hidden tax visible in real dollar terms.
- Endowment Effect: Second, reveal how this sunk cost is keeping them stuck.
- Opportunity Cost: Expose the big pain – and the compounding cost of time.
It’s not just what your prospects are losing now with the invisible tax of loss aversion and the endowment effect, it’s the compounding losses in the missed opportunity cost that’s widening the gap between their “current state” and their “desired state.”
Alright, I think you’ve got this part, now let’s move on…
The PURE GOLD: Hidden in PLAIN SIGHT
So, what have we learned thus far, my MUSE TREASURE HUNTERS?
First things first, remember that all breakthroughs in business start with thinking differently and doing the opposite of the prevailing opinion – this is a critical first step that cannot be overlooked.
Does thinking contrarily automatically generate breakthrough growth in business?
Ahh, no – but you already knew that.
Breakthroughs are a delicate, layered, and nuanced balance of “extraction, optimization, framing, positioning, utilization, leverage, and force multipliers.”
All of which are wrapped in empathy and in being of service.
That’s my take on it at least.
Oh, and let’s not forget about the actual product or service that you offer the market.
The best marketing in the world can’t fix a bad offer.
Seems obvious, but it’s not.
So, before you expertly follow the lessons you’ve learned here today, make damn sure your product or service delivers an OUTCOME & RESULT that transforms your client from their “current state” to their “desired state.”
Start with the end in mind and work backwards from there.
And don’t be afraid to TEST. (That’s another article entirely, we’ll save that for later.)
Until next time, stay unruly and study the history lessons of the past – for they will be your treasure map to the future, where you’ll find your PURE GOLD.
Committed to your success (however you define it) ~
