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Behavioral Intelligence

Markets Are Not Predictable but Human Behavior Is

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There are many research studies out there which demonstrate that the markets cannot be predicted by advisors and investors. The role of the advisor should be about managing the behavioral biases of their clients. The advisor is in a key position to influence the behavior of clients.

As human beings we all have certain decision-making biases that are hard-wired into us from early in life. These hard-wired behavioral biases can be predicted, as they are inherently part of our DNA which is scientifically measurable. The biases will usually reveal themselves in times of higher market volatility when a person is under more pressure or when a major life event takes place.

The key for investors is not to churn their accounts too much in times of volatility. For some advisors and investors whose DNA is more wired to be “fast-paced,” overtrading will be a greater temptation. As an investor, it is important to know how much your account is being actively managed. Active management can equate to overtrading and in the end could be costly or even destructive if not properly moderated.

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The other bias to recognize is that investors have a much greater aversion to losses than gains. Those investors whose DNA is more wired to be “patient” and “risk-averse” will feel the pain of losses much more; so managing their emotions in times of volatility is very important. These clients will need a portfolio that is very different from those that are higher risk-takers.

To know how to advise and communicate with each client uniquely in times of volatility, the Financial DNA Market Mood Dashboard will provide you with the insights for each client. Some clients will feel a level of exuberance in down markets since they see it as a buying opportunity and others will be fearful.

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