This post begins are 10 part series on Financial Behavioral Insights from our Financial Performance in the New Behavioral Economy White Paper. The financial behavior insights will help you gain greater self-awareness for recognizing some of your own behavioral tendencies and also those of investors.
Behavioral Insight 1:? The Influence of Natural Behavior on Decision-Making
Natural DNA Behavior predicts how people will respond to life and financial events, and therefore will drive many of their decisions, particularly when under pressure. However, at times their decision may be shaped by a significant life experience, circumstances or education.
Frank Butler retired at the age of 39 as the Chief Technology Officer of a company he co-founded and banked $4 million after tax. At the first financial planning meeting Frank told his advisor that he did not want to take any risk with his money. However, this did not seem consistent with his naturally daring and courageous style or the fact that he had used his natural instincts to take a lot of other risks in his business and investment life. When Frank was probed further, he did say that now that he had capital he did not want to take any risks with his money. Why? Frank said that his parents had gone from riches to rags when he was young and that event materially impacted his life. Ultimately, Frank and his advisor decided to adopt a strategy of being cautiously invested to start with and gradually accepting more risk as results were achieved. Nevertheless, at each annual review meeting Frank would ask his advisor why the returns were not higher.
What is driving Franks decision-making? We often assume it is the energy of money and emotions that drive investor decision-making. However, it goes much deeper than this. The correct starting point to understanding investors behavior is to discover their natural DNA Behavior, the core of who they are. This is the behavior that was hard wired into the investors by the age of 3 years old based on their genetic DNA and early life experiences. The natural behavior often sits deep below the surface, and the investor and advisor can be easily blind to it.
When investors are under pressure they will revert back to their natural DNA Behavior, as it is the go to or flip back behavior. Pressure is often caused by money, relationships and events, and this then drives emotions. What we have learned is that a persons natural DNA Behavior drives how he or she uniquely responds to life and financial events, and therefore how financial decisions are made. A key point is that the natural DNA Behavior will remain inherently consistent throughout a persons life and therefore is highly predictive. Of course, people will make investment decisions from time to time outside of their natural DNA Behavior because of current circumstances, life history, values and education or even because of advice they receive.
The advisor needs to use behavioral profiles upfront to objectively discover both his or her, and an investors, natural DNA Behavior. Further, there needs to be discovery of the learned financial preferences from life experiences, circumstances and education.
What are your thoughts?? For additional information on discovery through behavioral profiles, click here.