Most people would agree that knowing a truth is important. We are driven to find out how the world works and do our best to discern truth from falsehood. But that isn’t easy.
We like to think that what is real or true drives our decisions, and it certainly does to some extent. But our actions are more influenced by our perception of truth than truth itself. So, if we want to be able to improve our own decisions, or influence those of another, we need to start with understanding perception.
Perception is the Key
Even a perception that is incorrect is more powerful than a truth. That’s because perception is our individual reality; it’s truth to us – even though it may not be “true”. Perception is the product of our current beliefs and past experiences. Personal experiences trump truths. Experiences that are contrary to a stated truth may cause us to question the veracity of the “truth” or its application.
Most people are not crazy or looking to make poor decisions. But when we combine faulty perceptions with innate human biases, poor decisions become a likely outcome. Improving decision making all starts with identifying our current perceptions.
From Faulty Perception to Truth
So how do we correct a faulty perception in ourselves or others? First off, it is incredibly difficult to find a faulty perception in ourselves. This is because perception is our reality. How could that be incorrect? To find identify faulty perceptions requires us to check our ego at the door, be prepared to be told we are wrong and ask a trusted/respected friend where we may be wrong. We must be open to correction, which is against the confirmation bias and therefore not an activity we openly seek to pursue. It can hurt.
When we identify a faulty perception in ourselves or others, the first step is to identify the experiences or beliefs that result in that perception. Was a prior experience an anomaly or have another explanation other than “truth”? The law of small numbers is at play here. Is it possible that bad luck or chance resulted in the outcome rather than a different “truth”? Where did the person attain the beliefs behind the perception? Were they from an unbiased and credible resource? Is the information that underlies the belief accurate?
Once we identify what drives the perception, we can see where they are coming from. They are not crazy. With such viewpoints, the conclusion is natural. We must validate first, then pivot to truth. We can suggest and provide a few evidences of the actual truth. It’s not about anyone being right or wrong, it’s about adjusting the viewpoint. A person with an incorrect perception can be “right” given the faulty information, and we simply correct the information so they can continue to be “right” with the updated perception. It must be framed in a positive and uplifting manner if you want the perception (and subsequent behavior) to change.
Three Common Investment Misperceptions
Applying behavioral finance in your practice, or as some call it “behavioral coaching”, is all about teaching correct perceptions and reinforcing realistic expectations. Many of the misperceptions are simply because people haven’t been told otherwise. The availability bias looms large (as do many other biases) in our individual realities and “truths”.
- Confidence = Accuracy. This is a big lie, but alluring nonetheless. The brain loves confidence and may value it more than accuracy, especially in uncertain scenarios such as investing.
- “Experts” on TV, especially those I see often, know what’s going to happen. We have confidence in play, availability bias, familiarity bias and innate desire for some certainty. Combine that with zero accountability for “experts'” past recommendations, and you can see how this is a major issue.
- I’d never invest in XYZ because I have lost before when investing there. This is representative of a past experience and the law of small numbers. As crazy as something sounds, it can be believed if experienced even one time – especially if accompanied by loss.
Wrapping it Up
Understanding an investor’s perceptions is one of the greatest assets for an investment advisor. Once we understand them, we can find the belief/logic/experience that results in the faulty perception. At that point it is about validating how the investor came to that conclusion, demonstrating empathy and then pivoting to share truth in a positive and empowering manner.