Marketing Corner – June 5th, 2015

Understanding Behavioral Finance Problems


Have you ever made an impassioned, logical, and appropriate pitch for a prospect and they walked away? Have you ever created a tailored financial plan for a client and they chose to not follow through—even though it responded appropriately to their needs and unique situation? Of course you have. This kind of rejection is part of the prospecting process. You win some, you lose some. But it’s important to consider why, even with a logical, tailored, and appropriate solution, a client or prospect fails to see the key benefits of what you present to them.

Part of this can be explained with behavioral finance. Behavioral finance is a relatively new sub-field of economics that that seeks to explain financial actions and ways of thinking that may be irrational. These irrationalities are often identified as “biases,” some of which you are likely familiar with (i.e. gambler’s fallacy).

For an advisor or life insurance agent, these biases can represent real challenges to converting a prospect or making a client understand how your solutions best position them to achieve their financial goals. Consumers are often unaware of these underlying biases affecting their financial decision-making. Understanding these can help you overcome objections and clear more production. Here are five common biases to be aware of:

Loss Aversion

Loss aversion is the tendency for people to avoid loss instead of going after gains, in that the emotional character of loss is not equal to it’s numerical gain. For example, compare how you feel about losing $150 versus finding $150 on the street. This can impact a prospect’s ability to see the value of products with growth components, such as fixed indexed annuities, or it can even impact their consideration of any financial solution at all (status quo bias).

Snake Bite Effect

Once bitten, twice shy. It’s only natural for people who have a negative experience with financial solutions (or know someone who has) to be on-guard when presented with a product or plan. The issue here is that the conditions could be completely different or the consumer could be conflating products that are not comparable.

Endowment Effect

This bias describes the tendency of people to hold on to properties they already own, placing more value than they are actually worth. For instance, a prospect may have a large sum of money in a low-growth savings account, but because they have accumulated that sum over a long length of time, they may be averse to using these funds to purchase specific retirement vehicles that may be more appropriate for their retirement goals.

Mental Accounting

Mental accounting in finance describes an irrational bias in how individuals treat money compartmentalized into different “accounts.” People ascribe characteristics based on what that money will be used for or how it came to them. A consumer is likely to play with money that came from a windfall, even if they have debts or bills. Or a consumer might have a piggy bank used for saving toward a vacation, even though they have significant credit card debt. Although the money is the same (the debt and the change in piggy bank) both are treated differently because of their utility. Mental accounting can greatly impact an individual’s saving/spending habits. This bias can also affect a prospect’s receptiveness to repositioning funds, because of the separate accounts they come from.

Anchoring

This bias, observed in many different disciplines, identifies the tendency of an individual to latch (anchor) on to a specific piece of information and make choices based on this information–even when other details, contexts, or considerations are available. This can be a particularly damaging bias because a consumer with a strong anchoring bias returns to the same reference point to process new information.

While these are common biases you may encounter as an advisor, they certainly aren’t the only ones. As behavioral finance continues to develop and expand, more and more explanations are posited to

While these are common biases you may encounter as an advisor, they certainly aren’t the only ones. As behavioral finance continues to evolve, more explanations develop for why consumers behave irrationally or illogically. The important thing is to be aware of these filters and understand why prospects or clients behave the way they do, so you can sidestep any potential roadblocks to a sale.

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About the author

Legacy Financial Partners - Legacy Financial Partners is an independent and full service Life Insurance and Annuity FMO that provides specific marketing solutions to help their clients succeed. Using dynamic tactics, an extensive support network and progressive marketing options, Legacy Financial Partners provides unique and specific development strategies to their business partners.

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