Shocking News for Investors  You and Your Financial Advisor Are Biased

Shocking News for Investors – You and Your Financial Advisor Are Biased

I can hear investors saying, “I’m not biased” – well sorry but you are! And guess what? So is your financial advisor! But, if you take time to invest in knowing your financial behavioral biases you can work very effectively with them, instead of blindly against them

Understanding behavioral finance and the effects of human behavior on financial markets provides insight into the human side of financial decision making. This insight can help investors take a more rational and less emotional view and remain committed to long-term strategies and goals during periods of market volatility.

Seth

Both investors and advisors often make incorrect judgments based on personal beliefs, past experiences, personal preferences, and emotions. These biases direct them away from rational, long-term thinking. Further, biases focus the investor or financial advisor on only one aspect of what could be a complex financial decision-making process.

Ariel Cecchi – Consultant on Behavioural Economics and Service Design University of Geneva observes the following:

A common interpretation in behavioral finance is that rationality is the result of a pure cognitive process which can be behaviorally biased. In general, the bias has a negative connotation because it produces a distortion in the calculation of an outcome. When a decision-making process is cognitively biased the outcome leads to sub-optimal results or judgment errors. Roughly speaking, the subject might make irrational choices due to faulty reasoning, statistical errors, lack of information, memory errors, and the like. Differently, when the decision is emotionally biased, it means that the cognitive process has been influenced by feelings, affects, moods, and so on (let’s label these states “emotions”). This leads us to irrational decisions or actions.

Investor

Biases are influential underpinnings in terms of the decisions we make. Such behavioral biases cannot be completely eliminated, but recognizing them is the first step in managing them, reducing their effects and avoiding self-destructive behavior.

In increasing numbers financial advisors are adopting the behavioral components of investing. They may have worked with their investors for long periods of time, focusing predominantly on risk tolerance and objectives. Not so now. Advisors are making the effort to understand why investors often react in the moment and revert to short-sighted beliefs that may hurt their returns.

Many advisors are implementing behavioral insight processes that deliver greater self-awareness for recognizing potential advisor AND investor behavioral tendencies. Tools such as ones provided by Financial DNA measure each of these behavioral biases independently and display them on a Behavioral Management Guide. This enables financial advisors to discuss the strongest biases with the client and develop a strategy for managing them.

Managing money is too important to be driven by our emotions. Running to our inherent go to’ behavior when markets fluctuate has to be managed. The responsible first step in any investor/advisory relationship, therefore, is to objectively uncover the financial personalities of both advisor AND investor, using a measurably reliable, independently validated discovery process. Anything less degrades the advisor’s fiduciary responsibility and investor experience while opening the door for compliancy issues and loss of clients.

Carol Pocklington

Carol Pocklington - Human Behavior Solutions Analyst

Carol is a member of our research and development team assisting in the development of our behavioral products.
She has worked with Hugh Massie since 2001 since the Financial DNA understanding concept was conceived.


Carol's DNA Natural Behavior Style is - Facilitator


Carol is a Facilitator. Facilitators are persistent, goal-oriented people who promote team effort in order to complete tasks. Facilitators lead by setting examples and by achieving goals. Their strong work ethic encourages others to excel and they have an excellent ability to deal calmly yet firmly with people using a facilitative style.

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