Everyone is unique, and each of your clients needs a bespoke approach based on their goals, means and attitude to risk. But there are some ways in which all clients – indeed, all people – are similar.
Everyone is unique, and each of your clients needs a bespoke approach based on their goals, means and attitude to risk. But there are some ways in which all clients – indeed, all people – are similar.
Behavioural biases are a case in point. They’re mental short-cuts that are useful in everyday life because they allow us to make thousands of decisions instinctively. The problem is that they are nearly always unhelpful in the world of investing.
There are hundreds of different behavioural biases, and they fall into two main groups – cognitive and emotional.
Cognitive biases are errors of logic and you can counter them using data and rational argument. Examples include confirmation bias (the tendency to notice data that supports our existing view and ignore evidence to the contrary); gambler’s fallacy (the belief that if you roll a dice twenty times and don’t roll any sixes, you’re somehow “overdue” a six) and anchoring (our tendency to ascribe significance to random numbers – e.g. “psychologically important” levels in the stock market).
Emotional biases are tendencies to believe in things that give us a good feeling and disbelieve things that make us feel uncomfortable. Examples here include overconfidence (e.g. most people believe they are better than average drivers), loss aversion (the pain of losing money outweighs the pleasure of making money) and groupthink (all of my friends have bought it, so it must be a good investment). These are trickier to counter and rely on trust and building a positive long-term relationship.
Your clients are highly likely to be swayed by behavioural biases, especially during times of heightened uncertainty. The good news is that you can help them to overcome these biases and, in so doing, can add significant and demonstrable value.
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