So what exactly is Behavior Bias?
And can it be avoided?
Yes, Behavioral Bias can be mitigated, it’s just a matter of developing Financial EQ through behavioral awareness.
Good questions for Investors to ask and answer:
- Why do some Advisors repeatedly lose wealth and others accumulate it?
- Why, after developing investment goals, do some advisors then revert to knee-jerk reactions that may hurt returns?
- Is there more to advisors than just analyzing numbers and making decisions to buy and sell various assets and securities?
- How aware of their own behavioral biases are advisors? How aware are you, as an investor, of yours?
Behavior Bias is when we let emotions or our biases get in the way of smart financial decisions. In other words, it’s the gap between what we know we ought to do and what we actually do especially under pressure or in the face of uncertain markets.
For advisors to be successful, they need to be able to manage their “emotional reflex system” when volatile events happen. They can’t control the markets, but they can manage their reaction to them. And the same goes for how they engage you, their client.
Also, behavioral bias doesn’t apply only to advisors. As an investor, you’re equally likely to be caught unaware. Your thinking and actions are influenced by the same set of factors and biases that affect advisors in their financial decision-making process.
Qualities such as investing time into building relationships to build trust will help keep advisors from making personal investment mistakes. However, using a highly validated discovery process with your advisor will reveal decision-making behavior, immediately. Further, it helps uncover your own goals and priorities.
According to Carl Richards in his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money’:
“It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right, but it’s not rational.”
Simply put, the 5 tips to managing (you and) your advisor’s behavioral bias:
1. Acknowledge behavioral biases are inherent to everyone.
- identify emotional triggers, the inherent go to’ decision-making process, under pressure.
2. Never assume’ that you are not biased.
- as an investor, (driven by reputation, compensation, building a business, or managing expectations) you will make different decisions under pressure than when in a learned, calm, logical train of thought.
3. Keep your goals and financial capacity in focus-the big picture.
- this path to success will keep knee-jerk reactions from disrupting progress.
4. Everyone has an inherent hard-wired behavioral style, which is the core of who they are, and emotional reactions can be predicted, with the right tools.
5. Communication is the key.
- you must understand how to uncover a someone’s unique communication and learning style.
- Matching styles will close gaps in communicating.
Behavioral psychologists have long understood that people are not entirely rational. We’re influenced by a range of factors, from emotion to inherent behavioral biases, which make a less rational choice seem more appealing. If investors are to understand the behavior gap that will exist both for them and their advisors they need to learn about behavioral biases and other irrational behavior. Gaining this insight will deliver more effective and informed decision-making, which will stand up under market pressure.