Working with biases
To help clients feel confident in their investing plan—and in you—it’s important to understand how the psychology of investing works, how biases can influence investing outcomes and how behavioral finance can help you improve client relationships.
Biases: They're Human Nature
It’s normal to have emotional or irrational reactions to market events, because that’s the human thing to do. But biased responses can work against investing outcomes. By knowing what sways people’s decisions, we can help them make better choices.
The origin of biases
Biases that arise from mental shortcuts or beliefs are called cognitive biases. Those that come from strong feelings without a rational explanation are called emotional biases. For a cognitive bias, offer facts and logic to help reframe it. For an emotional bias, offer support and reassurance in the client’s investing plan.
Examples of cognitive biases
Anchoring. Getting stuck on a specific point of reference, like a stock price or investment yield
Selective memory. Remembering certain events and forgetting others
Herding. Following what everyone else is doing
Recency. Basing investment decisions on easily available or recent information
Confirmation. Seeking information that supports your points of view
Examples of emotional biases
Regret. Fear of acting because of regret over previous failures
Loss aversion. Playing it too safe to avoid losses over earning equivalent gains
Overconfidence. Putting too much faith in your own skills or abilities
Self-control. Spending or consuming today at the expense of saving for tomorrow
Addressing investor biases
Use this series of articles to dig deeper into common biases, why they matter and what you can do to help clients overcome them.
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Access an expert point of view
Want to learn more about leveraging behavioral finance in your practice and helping your clients understand how their emotions could impact their investing decisions? Ask us about our popular presentations—one for advisors and one we can give directly to your clients.