I write a lot about behavioral guidance, but what does this mean? Why is it important? Simply put, behavioral economics studies how real people act in real situations.
How you act and react to both planned and random events ultimately determines how well or how poorly your financial life unfolds. When we can guide clients toward better decisions and inject an element of rationale and experience, better results follow. That makes behavioral guidance pretty darn important!
The Invisible Gorilla
Classical economics assumes individuals act rationally and without emotion. Our brains and our biology have other ideas, however. When reading and researching in advance of making decisions, we tend to filter out information with unconscious biases so that our pre-selected conclusions are supported. This translates into a high level of inattention and lack of awareness.
A few years ago, Psychology Professors Christopher Chabris and Daniel Simons wrote The Invisible Gorilla.The book is about how our intuitions deceive us and lead us in the wrong direction. They also created a very brief video that demonstrates this issue plainly. Take a look:
Ultimately, it is nearly impossible for any of us to “self-regulate” our brain wiring and overcome our built in biases because they often reside below our level of awareness. That is, these biases largely operate in our subconscious.
Overconfidence is a Killer
Perhaps the most pervasive behavioral bias that we see among prospective clients is overconfidence. This is especially true in those of us with the Y chromosome. We sometimes talk with prospects who are almost “blustery” in their outward confidence about their financial/investment strategy.
Numerous studies, including The Folklore of Finance published in 2014 by the Center for Applied Research, demonstrate the huge disconnect between actual and perceived financial awareness among investors. We have a tendency to believe that we are much smarter than we actually are.
Financial Planning is the Framework
Our beliefs help us to “square the circle of life” and enable us to make choices that we think are in our best interest. The problem is, as The Invisible Gorilla video clip demonstrates, we screen out potentially helpful information that conflicts with our beliefs. To put it bluntly, we use rationale and logic to consider things that don’t intersect with our beliefs and emotionally consider things that align with our views.
From a practical perspective, financial planning provides a framework for making financial decisions. The planning goals and parameters help shape a path forward. Even so, it very often is our person-to-person intervention that helps clients understand both the possibilities and consequences of decisions. Start there. Ready for a real conversation?
How Fear Blocks Sales Success
Are Your People Struggling With Innovation?
Why Your Investing Lifetime is So Important
The Fascinating Questions of a 100 Year AI Life
The Number of Americans Who Feel They Will Be Better off in a Year Is at a Record High
5 Ways M&A Can Hurt Your Brand
The Enormous Impact of Company Culture on Business Growth
Confronting the Ghosts of Your Financial Past for Future Control
5 Attitudes to Enhance Aging
One Rarely-Used Strategy to Push Your Sales Copy Over the Top
Equities21 hours ago
The Bulls Are Getting Stronger
Markets22 hours ago
S&P 500? More Like The S&P 50
Development22 hours ago
5 Questions Prospects May Ask Before Deciding to Hire You as Their Advisor
Let's Solve It2 days ago
Is Inflation Really Dead?
Markets2 days ago
Could Cyclicals Make a Comeback in 2019
Equities2 days ago
US Technology Sector is Setting Up for A Momentum Breakout Move
FinTech4 days ago
The Next Global Financial Meltdown Is Just Around the Corner
Advisor4 days ago
Stay Away From Dumb Money: The Crowd Is Rarely Right