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
T he 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:https://www.youtube.com/embed/IGQmdoK_ZfYUltimately, 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 biasthat 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?
