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Are We Hardwired To Derail Our Own Investments?

This article first appeared on Nasdaq.

People don’t make rational decisions, including decisions about investing. The degree to which we make ludicrous choices depends on our DNA. (No, really; bear with me.) Decision making by both investors and advisors can be less reckless if we don’t understand more about individual behaviors and why we make the financial decisions we do. Are we hardwired to derail our own investments?

Factor into this mix emotion and a lack of financial education, and this further increases the likelihood that decision making can be faulty for both advisors and investors. Getting inside our brains to see what’s going on when we make decisions is not only doable, it’s also measurable.

As behavioral finance (think How and why we make the financial decisions we do) goes mainstream, investor behavior has become more accepted as the major influence on investment performance. If advisors have no read on how or why investors make certain decisions, mistakes will be made.

So how does one become what I would call Behaviorally Smart? According to its annual Quantitative Analysis of Investor Behavior, Dalbar – a financial services market research firm – says investment losses to individual investors due to their behavior is an average of 8 percent per year over the last 30 years.

And this is not just limited to the investor. Based on a study by Cabot Research, professional investment managers are leaving 1 percent to 3 percent a year on the table, which is significant when you realize the size of these large portfolios. So even the professionals who use sophisticated technology and extensive research make mental errors in decision making.

After all, they are human and must manage cognitive biases and emotions when under pressure. The more aware you are of yourself and what makes you successful and what causes failure, the better off you’re going to be financially and professionally.

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So, how can investors improve? There is no simple tonic to improved performance, as this requires wholesale behavioral change – a paradigm shift in how someone engages the world around them. The key, then, is understanding your unique financial personality. Among other things, this insight provides a greater level of self-awareness: Why do we repeat our mistakes?

Advisors and investors alike need to develop an investment process that provides a check yourself before you wreck yourself step to mitigate these blind spots.

Through more than 15 years of research, I have learned that easily identifiable behavioral traits lead to patterns of decision making that are very closely aligned with the structure of an investors portfolio. In other words, the combination of traits and patterns makes up your financial personality style. Your portfolio, therefore, mirrors who you are. In fact, investors should look at their portfolio as the composition of all their decisions and not just a series of market positions.

The reality is that some behavioral biases cost more than others. Based on Cabot Research, the top four ways the brain can wreck investment performance are:

  • The Endowment Effect – Holding winners too long. The investor falls in love with a winner and loses sight of the fact that its best days are gone. There is the fear of selling the position too early.
  • Risk Aversion – Selling young winners too early. The investor has fears about the future and does not want to take the bumps in the road as the stock increases in value.
  • Loss Aversion – Holding losers for too long. The investor is fearful of taking a loss and ends up with a portfolio full of losers.
  • Regret Aversion – Not adding to winners when they take off. This is an investor who is hesitant in their decision-making and backs out of building the stock position as it gains momentum.

Based on your history of decision-making, which of these patterns have cost you the most? And remember, there are many other behavioral biases, which, coupled with these, will further contribute to reduced performance. To help you on the journey of closing the investment performance gap, start with self-awareness of your behavioral traits.

For investors, this could be as simple as asking your advisor if he or she uses a validated behavioral insights tool that looks beyond risk-tolerance testing. For advisors, the time and money invested in adopting such a process can pay big dividends for you and your client, pun intended.

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

Why not complete your own complimentary profile and see which behavioral biases may affect your financial decision-making? Click here

Are Women More Risk Averse Than Men?

Very often the point is made that men and women are different. In the area of investment risk taking, some research suggests that women are more risk averse. Some of this research is referenced in the first of BlackRock’s three-part blog series on gender differences, Men vs. Women: Risk Aversion.

The first point is that the behavioral research generally shows that the structure of men and women’s brains is different to some degree.? Then add the significant physiological differences. This is why it has been said that “Men are from Mars” and “Women are from Venus”. The differences can be reflected in very different beliefs, values, attitudes including to taking risks.

I would like to clarify the difference in terms of risk taking more from the stand point of our DNA Behavior research, which has been independently validated. Our DNA Behavior research shows that the natural instinctive behavior of men and women is generally the same. That is based on natural behaviors as many men will take risks as women. This will be their decision-making starting point. The research is true of other behaviors such as taking charge, being outgoing or social, being empathetic, goal driven or creative. The fact is that there are women out there whose first instinct is to take risks. Similarly, on the other side, there are an equal number of men and women who are instinctively cautious. Again, there are men out there who by nature do not take risks.

However, it is also important to recognize the influence of “learned” behaviors on a person’s personality development or evolution. This is where the substantial differences between men and women can arise because they do have different values and attitudes coming from the differences in how their brain’s are structured and the physiological differences. For instance, what we see is that a woman may be naturally (instinctively) a risk taker but her nurturing attitude to protecting the family will kick through and lead to cautious behaviors. Or, in the case of another women she may be born cautious but have to at times take risks to generate income and capital for the family. But, there will still be an overriding careful attitude to it.

The main point here is not to automatically assume all women will be naturally more risk averse than men.

The same point is true for advisors who think that the men make all of the decisions in doing the financial planning. In some cases the man may lead the process as head of the household and bread winner, but he may not be the power player in making decisions – the women may be far more take charge and direct the decision-making.


Hugh Massie is a Human Behavior Strategist, successful entrepreneur and a leader of the “behavioral awareness” revolution in businesses worldwide for unlocking human potential. He has 26 years of unique and diverse international experience in developing client centered human behavior solutions.


Visit the Financial DNA website to learn more about helping couples improve financial and life decisions through an enhanced relationship with money.