How Advisors Can Overcome Their Clients’ Worst Prejudices
The decision-making mechanisms of the average investor cannot be described in dollars and cents, according to Laura Coviello, vice president and senior portfolio manager of Brinker Capital Investments, an Orion company.
Investor decisions are best described in terms of ideas and beliefs, and are shaped by concepts of behavioral finance, she said.
âBehavioral advice explains the mess of human nature,â Coviello said today at the financial advisor’s Invest In Women conference. âWhen you think of finance it’s usually about dollars, cents, quantitative models and fundamental analysis, but there are really people behind it all with their own thoughts, feelings and ideas about the world that determine the decisions they make about their portfolios.
The human brain is an exceptional consumer of resources, explained Coviello. Although it makes up 2-3% of the human body weight, it consumes up to 25% of the calories a person takes in. So the brain is always looking for ways to take shortcuts.
It’s in these shortcuts that behavioral biases form, she said.
Here are six biases that Coviello has seen in clients in recent years:
Coviello uses in-store sales as an example of anchor bias. If someone has seen the same pair of shoes twice, once they sold for $ 100 in a store, and again sold for $ 100 but down $ 500, most of the time they will instantly assign that $ 500 value. to shoes.
Likewise, a client who goes to an advisor with $ 8 million, takes advantage of a big gain of 25% to grow his wealth to $ 10 million, but then loses 5% to end up with 9. , $ 5 million, will generally consider himself to have experienced a loss of $ 500,000 rather than a gain of $ 1.5 million, Coviello said.
Human beings naturally seek out and retain more information that matches their already established beliefs and assumptions, Coviello said.
âWhen you get information that is not what you already think, you are going to place less weight or importance on that information than the information that aligns with your frame,â she said. âInformation that doesn’t line up creates cognitive dissonance and forces your brain to work harder. “
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