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5 Things to Know About Behavioral Finance

To be able to fully understand an investor’s decision-making process, financial advisors need to equip themselves with the knowledge, skills, and understanding of Behavioral Finance.

When taken right back to the bare bones of it all, a human being’s most basic natural instincts are based on emotions and psychological reactions triggered by a variety of events. When it comes to making investment decisions, these natural reactions are brought into this as well.

A second way that humans make decisions is through conscious thinking. Now, these behaviors are slightly different from survival behaviors because they are learned as a result of experience, and so people are able to adapt to changes in their environment. 

These natural instincts as well as the learned behaviors, all carry across into the financial decision-making actions that people act upon.

 1. What is Behavioral Finance?  

Behavior Finance is essentially understanding the underlying psychology of financial decision-making. It combines cognitive psychology with economics and finance. 

The objectives of Behavioral Finance are to understand why individuals make certain investment decisions.

For example:

  • Emotions are responsible for our quick assessments that influence financial decision-making. Positive emotions lead to more risk-taking, optimism, and in addition, buying decisions are made faster. Investors are well aware of the roller coaster of emotions they go through including hope, excitement, euphoria, fear, despair, regret, and sadness.
  • Another example is Herd Mentality. Herd Mentality is when a person feels pressured into making a decision just to conform with the largest crowd and their rationale behind it is that ‘so many people are doing it, it must be right.’ The dotcom bubble is a perfect example of this. Between 1995 and 2000, investors were backing internet-based startups hoping that they would soon make a profit. 

2. We all have biases

We all have Behavioral Biases which are irrational beliefs or behaviors that can unconsciously influence our decision-making, and stray us from rational decision-making.

However, our biases lead us to make less than optimal decisions.

The Behavioral Biases embedded in humans are responsible for irrational decisions that result in poor financial or insurance investment. We need to be made aware of our personal biases and try not to let them influence our financial decision-making. 

As Hugh Massie, our CEO and Behavioral Strategist explains, we focus on 16 Behavioral Biases that affect people’s financial decision-making. Once you can identify and understand your top two or three biases, you can become a better decision-maker, especially when under pressure.

3. Spending patterns are written all over us

Behavioral Finance is the answer for advisors who want to learn more about investors and how they intend to spend their money.

It has typically been a problem that advisors haven’t had enough information and insight into their clients’ spending patterns and as such, could only create financial plans without truly understanding what people planned on investing in or saving up long-term.

4. You can’t spell “behavior” without “risk” in it

By now, as an advisor, you should be able to understand that a person’s behavior is intrinsically coupled with the amount of risk they are willing to take. To be able to help your investors experience long-term financial success, determining their risk factor will play a major role in determining their strategy.

When you choose to work with us, you will benefit from our Financial DNA reports that provide a step-by-step approach to determining the risk behavior of clients, couples, and advisors.

You see, every single person has a Risk Behavior number ranging from 0 to 100, and it’s based on their Risk Tolerance and Risk Propensity. A higher score means they are more likely to take risks. The score is normally distributed with an average of 50 and a standard deviation of 10.

5. Financial DNA takes the guesswork out of investing

When you work with us, we help you build a system to understand your clients, where you will be able to connect with them, and customize their experiences.

By understanding your client you will be able to communicate with them in a more relatable manner; you will to know and understand their risk behaviors and spending patterns and it will be easier to understand and determine their financial goals. 

Our Financial DNA API sets us apart because it measures 500+ behavioral insights and will be a way to add a human element to your data. This is done with details on how people communicate, invest, work and live their life.

In Conclusion

At Financial DNA, we have years of experience to help you better understand your clients. If you are interested in our Financial DNA investor experience, basic Financial DNA reports, and 1:1 onboard coaching, start a free trial today.

Our Word for 2021 Is Authenticity

It has been a frequent practice as of late to choose a focus word that would sum-up your current or upcoming year. The purpose of it is to set an intention, a goal you seek to achieve, or a quality of some sort that you want to ensure you actions throughout the year are being filtered by.

The start of a year is usually a natural time to reflect, celebrate, and plan. What has been known for decades as new year’s resolution has now been reframed as new years intentions.

This is something that we at DNA Behavior have been doing for years. We built our process to be inclusive of many qualities, the main one being authenticity. You see the process of gathering scientifically based behavioral data is interesting. Filled with comments and contradictions.

We at DNA Behavior have seen and heard them all. The most often heard is:

  • that is such an accurate report about me
  • I thought completing the process would be easier
  • but the process was hard
  • I didn’t know which way to respond
  • I had to just go for it
  • look at how accurate the outcomes are
  • I really like the DNA results, but the journey was hard

And so much more. We make no apologies for the 10-minute DNA Natural Behavior Discovery questionnaire using 138 different words in 46 interlocking Forced Choice Questions. The questions are deliberately tight so that a specific outcome is achieved. Definitely, a right data in, right data out approach has been taken.

We know the importance of being able to authentically defend our discovery process is why we are so well positioned in the marketplace. When the DNA Discovery Process was designed it was critical, too, that the questions removed situational, cultural and educational biases and could not be easily gamed. Further, at all costs we wanted highly predictive measurable behavioral insights which would be universally applicable across the globe for all people and remain true for the long term regardless of the situation or circumstances the person is in. In other words, it would get to the core of who the person is. We knew this holy grail of behavioral measurement could be achieved and is forever grateful for the knowledge and guidance of Carol Pocklington and Lee Ellis to show the pathway.

Yes, we could simplify the questionnaire, but why would we? That said, we listened to our customers, and one of the important business keys we discovered was that customer concerns are a rich source of marketing material. One of our friends – David Rendell talks about in Freak Marketing that looking to your greatest weaknesses will be sitting your greatest strength.

If customers were loving the outcome but not the process, what was this saying about our discovery process? We discovered (though we knew it) that our process may be antagonizing our customers by the tight choices it asks them to make when choosing Most Like and Least Like from 3 non-situational words or phrases across 46 questions. Some say, I am all of those in about 6 to 8 of the questions.

What the questions are doing is getting the participant to prioritize their greatest strengths/talents. It is not saying for the 3 choices they are not like them in any way. In varying degrees, we exhibit all the words in some situations. It is more about how regularly and strongly the behaviors are exhibited.

Overall, we found ourselves being able to offensively defend the questionnaire since it more reliably delivered better, deeper and more incisive insights into unique behaviors over long time periods. Again, when you must make serious decisions, do you want to participate in a fun and sometimes lengthy process which gives you a shallow and unreliable result? Or, would you rather participate in a quick but tight process which provides a deep set of very accurate insights that will be true for your life time?

Our purpose with the DNA Discovery process is to uncover the natural DNA behavior that sits below the surface; it is not seen because it is masked by the more dynamic (situational) learned behaviors that are shaped by the person’s life experiences, education and values.

Therefore, a person’s overall personality, at any stage of their life, may be seen to change, but their core natural behavior will remain very consistent. Further, revealing core natural behavior draws out their inherent talents, strengths and struggles (blind spots) and communication styles.

The DNA Behavior Natural Discovery Process was designed to holistically uncover, capture and measure all dimensions of a person’s natural DNA behavioral style as the core of their personality. That is their ingrained, go-to, hard-wired behavior that was set by the time they were 3 years old. This is how people inherently make decisions, take direction and work with others; how they interact and build relationships, achieve results, handle information, complete tasks, develop trust, set and achieve goals, take and live with risks and their learning styles. This also includes their communication style, financial decision-making style, behavioral (finance) biases and their response to market movement (as an example).

After significant academic research and discussions with our independent team of experts, we selected the Forced Choice Assessment Model over the more traditionally used Normative (Likert-type) Scaling Model for measuring Natural DNA behavior. This led to the design of the DNA Natural Behavior Discovery Process; a system capable of assessing 8 major personality factors as well as 24 related sub-factors. The fact we can reliably measure 32 behaviors from 138 words across 46 questions is remarkable given that other systems need 15 to 25 questions to measure 1 behavior with less accuracy.

So, what is the Forced Choice Assessment- The traditional Forced Choice Assessment format is a descriptor used in psychometrics to signify a specific type of measure in which respondents compare two or more desirable options and pick the one that is most preferred. This is contrasted with measures that use Normative/Likert-type scales, in which respondents choose the score (e.g. 1 to 5) which best represents the degree to which they agree with a statement. Source: https://en.wikipedia.org/wiki/Ipsative

A correctly structured Forced Choice format using singular words (versus sentences and statements) presents the individual with item options that are equal in desirability with situational, cultural and educational biases removed; this ensures response choices they make will be far less likely to be influenced by social desirability, circumstances, experiences education or environment. Therefore, the outcomes will reveal inherent behaviors, hardwired core traits and strengths and struggles of the person being assessed which are universally applicable.

We are aggressively authentic in defending our method, the outcomes and the process. Were not embarrassed about this. Our approach is intentional.

Tight questions, using the Forced Choice methodology, get great life results and outcomes which are very strong. This enables individuals to understand their unique inherent behavior and from that position make strong life and business decisions.

The Forced Choice format forces the participant to instinctively choose their answer, and respond more truthfully, as there is not one obviously desirable quality to pick from. Also, the Forced Choice format reduces the potential for the participant to agree or disagree. A Forced Choice format using triads of items (a block of 3) enables greater insight into the interactions between the items for enabling more specific measurement of the behavioral factors (traits).

Further – the results place behavioral knowledge firmly in the hands of the individual. From this position –

  • They are better able to understand who they are in terms of strengths and struggles.
  • They have substance upon which to base life, financial and business decisions.
  • It tells people how to manage their communication style.
  • It reveals talents both overt and hidden that can be applied to career choices.

One of the important outcomes of this discovery approach is to understand that strengths, (upon which most people focus) can, under certain circumstances, become struggles and are difficult to manage without self-awareness and knowledge.

Why not spend 10 to 12 minutes learning about your own unique natural DNA style. Take the Business DNA Natural Behavior Discovery process or the Financial DNA Natural Behavior Discovery Process. Use the link below to take you to the questionnaire.

This scientifically based and validated discovery will reveal significant aspects of your natural behavioral style that is the core of your personality. It will help you as make healthy life, business and financial decisions.

Contact us if you would like to discuss this. Our highly skilled consultants will provide you with feedback on the discovery and help you to take the next step in building a behaviorally smart life. To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email inquiries@dnabehavior.com, or visit DNA Behavior

People behave differently

People Behave Differently – Thankfully

This article first appeared on HR Management App.

As the founder of a Human Performance Acceleration firm, I’ve come to understand the importance of diversity, not just on boards and in leadership, but in my own business.

Through broadening the composition of the leadership team, I’ve found that such diversity increases the richness of discussion and expands perspectives from the top down. The challenge is managing the differences such diversity brings. No two people think or behave alike.

As a firm, we manage behavioral differences. And we have technology to help with this. In fact, that IS our business. That said, on a personal level and as a leader who is fast-paced, results-focused and on to the next big thing while everyone else is still thinking about the last big thing, I needed to understand and manage the behavioral differences in my own team.

LEADERSHIP-TEAM-SLIDE

From the top down, and that meant me

As the leader I couldn’t delegate this. This required my full focus and attention if I were to build a successful business.

Take an example team such as mine. The first hurdle was figuring out roles.

  • What did the business need to grow successfully?
  • How much involvement did I need in that process?
  • Where were the priorities?
  • What skills did I have to be able to manage a diverse team?

It became clear, very quickly, that managing a diverse team, all with spectacularly differing skill sets, required some thought.

Here’s what I did. Many of the lessons are transferable:

  1. I completed a scientifically validated behavioral discovery. One that not only revealed my inherent behaviors but also my learned behaviors.
  2. I then took advice on how best to manage myself. I needed to understand my own trigger points. I needed to check myself before I wrecked myself (and others). I needed to understand my EQ and what I needed to put in place in the organizational structure to enable individuals to contribute to business growth, using their skill sets, at a pace I accepted. This was not easy.
  3. As I hired executives, I took every member of my leadership team through the same process. This was invaluable as we not only came to understand each other, we bonded. We built mutual understanding and respect for each other.
  4. After about four years I found I could delegate more and more control to my managing director, leaving me free to promote the business on the speaking circuit, for instance.

Recognizing and leveraging differences

The biggest challenge I faced was trusting others to run the business. This came with time. More importantly, it became possible because our understanding of one another’s behavioral differences meant we could manage those differentiations and work effectively together.

Our core business has always been about understanding behaviors. Our industry focus is wide and varied but has tended to be in the financial advisor-client relationship space, as well as business leadership.

Now, go big

Through our API (Application Programming Interface) solution, we now deliver real-time behavioral management solutions through validated behavioral insights that connect, customize and power human performance. That was crucial because it enables this understanding and deployment of differences methodology scalable.

If it didn’t scale, it wouldn’t be very useful – at least not in a practical way – beyond small organizations. Happily, the scalable customization of experiences and relationships across a whole enterprise is now a reality.

This process of getting the People Culture at my own firm in order leaves me free to travel globally to promote our solution and to invest time in leaders still making their way on the journey of building a business. What could a thoughtful People Culture process like that described above enable you and your organization to accomplish?

DNA Accredited Financial Advisor Training

DNA-Accredited Financial Advisor Training Provides Edge

We are excited to be hosting DNA Accredited Financial Advisor Training for two days, April 24-25, in Atlanta. Space is limited, so please register soon.

The comprehensive workshop is for financial advisors and wealth managers already familiar with the Financial DNA Discovery Processes, which advisors use to learn the communication styles, financial habits (including setting goals, spending and saving) behavioral biases and risk profiles of clients.

As many of our readers know, Financial DNA provides real-time behavioral insights that enable customized delivery of meaningful advisor and client experiences, with improved outcomes on both sides of the relationship. The workshop builds on the foundation of Financial DNA-savvy advisors, helping them become what we call Human Performance Accelerators, learning unique financial personality insights to further help clients achieve greater self-empowerment- and wealth accumulation.

The training also is recommended for any organization considering implementing a DNA financial personality management API solution.

The six pillars of DNA Financial Planning Performance will be explored in-depth using the company’s proprietary behavioral insights tech platform. (The only validated behavioral insights fintech of its kind.) Attendees should then be able to not only deliver better client outcomes, but also be able to increase and sustain profitability.

The practical and experiential training program addresses Natural (inherent) Behavior and How to Deploy the Financial DNA Discovery Process to meet the behavioral challenges of every client on their own unique terms.

  • (Advisors) discovering their own strengths and struggles;
  • Learning how to use behavioral insights in relating to different clients more effectively; and
  • Identifying ideal clients and keeping them engaged.

Also covered: Learned Behavior and Additional Behavioral Finance Insights, including:

  • Techniques for improving client meeting facilitation with powerful questions across multiple communications channels; and
  • Building behaviorally smart portfolios which align client risk-taking, decision biases, goals, spending and financial capacity.

Attendees also will benefit from a very special new offering: An interactive dinner, Thought Accelerators: Future Fintech, at which training participants ranging from beginners to experts will discuss behavioral insight challenges and solutions, further activating what they have learned toward practical, powerful outcomes.

Complete information and registration for DNA Accredited Financial Advisor Training can be found here. Location information – Dunwoody (North Atlanta), just outside the perimeter – is included at the information and registration link. Those completing the two-day training will receive DNA Accredited Financial Advisor certification.

Who should attend? Financial advisors, wealth managers and others who want to master validated behavioral finance insights that accelerate the results achieved by both advisors and their clients. And, again, the training also is recommended for any organization considering implementing a DNA financial personality management API solution.

See you in Atlanta April 24-25. (Can’t make it then, let us know so we can notify you of future trainings and Thought Accelerator dinners.)

Financial DNA offers:

  • Unparalleled depth and reliability of psychometric validation for 64 core natural behavior traits to identify a client’s unique financial personality;
  • Separate measurement of a client’s communication style, spending and goal-setting behaviors, risk profile and behavioral biases;
  • Unique process for matching advisors, clients, and solutions using our extensive behavioral finance data;
  • Comprehensive wealth mentoring system to help advisors guide their clients in making life and financial decisions; and
  • Digital solutions for practical and scalable delivery across a firm’s whole client base.
Pioneer

How Not to be Named and Shamed in the #metoo Movement

This article first appeared on HR Management.

As leaders, we have a responsibility to understand the impact our behaviour has on the people we have the responsibility (and the privilege) of leading.

No longer is it acceptable to bully, manipulate, harass, individuals just to achieve our goals. No longer is it acceptable to take risks that compromise the business and alarm and unsettle staff. No more can position, authority or power be used to compromise a colleague.

Leaders need to have significant insight into their leadership style, their communication approach, their bias, and yes, we all have biases. Further, successful organizations invest in knowing its leaders and individual employees are attuned to these things.

Aggressive and controlling management styles are no longer acceptable. The greatest and most effective leaders know how to guide, mentor, and invest in their people, knowing that this sets individuals and teams up for success.

Leadership is complex; it takes character and self-awareness. It requires a level of vulnerability and re-thinking if leaders are to be effective. Allowing bottom-line results, aggressive deadlines and demanding stakeholders to style your approach to leadership is a recipe for disaster.

The leader who is behaviourally smart is the winner. When you understand the importance of getting below the surface of yourself and the people you lead and understand how best to invest into them, businesses flourish.

Inherent behaviour is fixed: Its who a person is; its the foundation. Its the raw material that informs how the world is viewed. It cant be learned. It drives talents and personality. It is fundamental hardwiring.

Personality is driven by behaviour: Its the mask worn; its a persons outward character. Its what we let others see on the surface. Personality is formed and revealed from circumstances, social pressure, education, social environment and family influences. Its the sum of the physical, mental, emotional and social characteristics of an individual and can change as circumstances dictate.

Having a revelation about the difference between inherent behaviour and personality not only educates, but, more importantly, it paves the way for leaders in business to understand what their role is in revealing behaviours which will remain constant over time. It gives insight and understanding into knowing when they are viewing the mask. Behaviour is the real person. Personality is the outward appearance an individual chooses to reveal.

Uncover this knowledge about yourself and you will quickly understand the importance of knowing it about the teams you lead.

The responsibility for effective team functioning and dynamics lies with you, the leader, and as such, demands a level of self-awareness that ensures your legacy will not be crossing boundaries and becoming named and shamed in the #metoo movement.

Using a highly-validated discovery process can deliver insight into both inherent and learned behaviour all of which is measurable.

It can reveal communication styles. This above all creates powerful leadership and team development. With this kind of insight, messages are appropriate and clear. Individuals understand what they are being asked to do and why. Great communication insight is especially crucial in times of pressure, when blunt exchanges can surface.

Examples of key communication insights that are powerful both for leadership and the team are shown in the quadrant graphic. There is powerful value in leadership learning how to connect with each style and stay connected and then use this knowledge and insight to build optimally functioning teams.

Learn what lurks beneath, and use it to your advantage.

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To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email inquiries@dnabehavior.com, or visit DNA Behavior.