Marketing Corner – 5 More Behavioral Finance Biases You May Face From Clients and Prospects
5 More Behavioral Finance Biases You May
Face From Clients and Prospects
Why do your clients balk at logical solutions? Why do prospects shoot down options that accomplish what they need? Why do you sometimes get panicked calls in the middle of the night to undo a sturdy financial plan? The sub-field of economics called behavioral finance seeks to explain the underpinnings behind individuals’ irrational actions. These biases aren’t just cute pieces of trivia; they can have a dramatic impact on the client or prospect’s overall financial plan and prevent you from clearing business. At play within these biases—psychology, broader social science, and deeply held evolutionary tactics.
Many times these biases involve placing an illogical value on money and numbers, but they also point to how people view money beyond it’s numerical valence. After all, the value of money in retirement is not the amount, but what kind of life it buys you. With high stakes, it’s understandable that individuals might not make the most rational decisions.
We’ve previously discussed five common behavioral finance biases you may encounter. Here are five more.
Confirmation bias can be found in many different fields, like science, journalism, politics, and criminal justice. The central premise of this bias is that an individual ignores or reframes contradictory information to support their predetermined conclusion and exaggerates information that seems to support this conclusion. Confirmation bias can lead to overconfidence, which when applied in the financial world, can have dramatic consequences. A prospect or client exhibiting confirmation bias may discount your advice, even if you can back your recommendations with recent research and relevant news information.
Combating Confirmation Bias: One way to combat this particular bias is to reduce a scenario to its simplest hypothetical expression. Frame options with “just for the sake of argument…” or“ let’s play Devil’s Advocate…”. Use metaphors outside the world of finance to highlight distinctions between irrational and rational choices.
This bias describes the tendency of an individual to use recent performance as an indicator for the overall performance. For example, someone with money invested in a hot stock that has seen spectacular two-month gains may want to invest more into the stock. The investor may ignore the bigger picture and other relevant information. If the investor is lucky, the stock keeps rising. If not, the investor may experience a historical dip that its evident looking at the stocks’ performance on a larger timeframe.
Combating Recency Bias: Present a wide-array of data, recent and over longer timeframes.
Illusion of Control Bias
As the name suggests, the Illusion of Control bias describes an individual’s tendency to assume more control than actually is available, often in very irrational situations. This can lead to ascribing control and influence to a positive result that is logically uncontrollable and random. This then affects future decision-making, which can have drastically negative results.
Combating Illusion of Control bias: Provide examples of when individual’s actions did not lead to a positive result.
If you listen to daily market reports you may be familiar with the effects of the overreaction bias. When new information about a company, commodity, or market segment is released, some investors may overreact, causing a dramatic pull away from the item’s true value. This can be particularly impactful at the individual level, where a client ignores your recommendations and best practices as a result of new information.
Combating Overreaction Bias: Give contrasting information or research, identify alternatives and options, provide historical data or context.
Presenting products and interacting with consumers, you likely know how you say what you say is just as important as what you say. The framing bias describes individuals’ tendency to choose a positively framed option over a negatively framed one, even when the net result of the choices are the same. A slim negative overwhelms the positive probable. The mechanics behind this bias are similar to the loss aversion bias.
Overcoming the Framing Bias: Present the positives while acknowledging the negatives.
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