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BEHAVIORAL INTELLIGENCE
Shocking News for
Investors – You and Your
Financial Advisor Are
Biased
BY HUGH MASSIE | JUNE 14TH, 2016
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Written by: Carol Pockington
I can hear investors saying, “I’m not biased” – well sorry but you are! And guess
what? So is your nancial advisor! But, if you take time to invest in knowing your
nancial behavioral biases you can work very e ectively with them, instead of
blindly against them
Understanding behavioral nance and the e ects of human behavior on nancial
markets provides insight into the human side of nancial 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.
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
nancial advisor on only one aspect of what could be a complex nancial decisionmaking process.
Ariel Cecchi – Consultant on Behavioural Economics and Service Design University of
Geneva observes the following:
"A common interpretation in behavioral nance 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. Di erently, when the decision is
emotionally biased, it means that the cognitive process has been in uenced by
feelings, a ects, moods, and so on (let’s label these states “emotions”). This leads us
to irrational decisions or actions."
Biases are in uential underpinnings in terms of the decisions we make. Such
behavioral biases cannot be completely eliminated, but recognizing them is the rst
step in managing them, reducing their e ects and avoiding self-destructive
behavior.
In increasing numbers nancial 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 e ort 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 nancial 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 uctuate has to be managed. The
responsible rst step in any investor/advisory relationship, therefore, is to
objectively uncover the nancial personalities of both advisor AND investor, using a
measurably reliable, independently validated discovery process. Anything less
degrades the advisor’s duciary responsibility and investor experience while
opening the door for compliance issues and loss of clients.