My financial advisor finally tracked me down today. He has been calling and emailing me for a week. I wasn’t consciously avoiding him, but I know what he wants. It’s time for my semiannual portfolio review and realignment. For me, that’s like going to the dentist.
My financial advisor has a difficult job, but not for the reasons that you might think. On paper his job is to help his clients achieve their financial goals and we assume that means analyzing and picking the right investment opportunities. His real job is to help us avoid making bonehead mistakes… because when it comes to finances, we are all prone to making bonehead mistakes.
For example, when the stock market crashed in 2008, my first instinct (and seemingly everyone else’s at the time) was to get out of the market. Everybody panic!
But he gave me this sage advice: “Why would you want to buy high and sell low? Does that sound like a sound investment strategy?”
So, I didn’t. And the market did eventually come back.
Here’s the thing: I know enough about investing and investment strategies to be dangerous… mostly dangerous to myself. What’s interesting is money and investing is data-driven and fact-based. Yet, it brings about our emotional thinking like only love and fear can.
Maybe that’s because money represents elements of both love and fear. On one hand there’s security, comfort, achievement, respect, dreams and expectations. On the other hand, there’s fear of loss, which is one of our most powerful fears and a major motivator of behavior.
Ok, this post isn’t about money and finances, but rather how we behave when in doubt. Money seems to amplify the phenomenon, so we’ll use it to illustrate my point.
As I mentioned earlier, when the stock market crashed everyone was in doubt. No one really knew what was going to happen. Although most investors understood the concept of buying low and selling high, many, many people sold when the market was in the ditch. But, why?
Doubt is an autopilot trigger of irrational thinking that is full of unconscious biases. It primes us for poor decision-making and sets us up for influence practitioners to steer us in a particular direction. In my book, PERSUADED, I referred to doubt as having too little information, which is one of the six momentary lapses of reason.
One common approach human beings have when in doubt is to diversify. Behavioral economists call this the “1/n bias,” meaning, we tend to choose equally between the options available to us. Diversifying evenly is akin to hedging our bets. We believe it protects us against making the wrong selection… even when it doesn’t.
Unfortunately, we tend to weigh each choice evenly, which can get us into trouble.
Studies have explored the investment behavior of intelligent, well-educated professionals. Subjects were given the option to invest in balanced funds (which automatically diversify by allocating a set percentage of equities and bonds) and either a stock fund or a bond fund.
What they found was quite interesting. Subjects would invest in a balanced fund that met their risk tolerance and in the other fund option… skewing their diversification heavily in favor of the non-balanced fund’s focus: stocks or bonds.
By allocating their investment in each of the choices, the investors unwittingly amplified their exposure to the focus of that fund. In essence, they were actually diversifying less. They weren’t really hedging their bets, but rather putting more of their eggs in one basket.
The lesson here is this: the choices affect our decision making.
As a practitioner of persuasion, you can influence a decision by carefully framing the choices because human beings tend to make decisions based on the options presented to them.
However, when in doubt, we avoid making a decision by employing the peanut butter approach, spreading our resources evenly and hoping that one of the alternatives is the right choice.
If you choose not to decide, you still have made a choice.
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