Why Fighting Client Biases Is Futile

Helping people identify and understand the behavioral biases and emotional drivers that influence their financial and investment decisions is an approach all financial advisors should be taking today. But Denise Shull, an internationally recognized decision theorist and founder of risk and performance advisory consulting firm The ReThink Group, believes that the next step many advisors may be taking—trying to get their clients to overcome those emotions so that they don’t make the same mistakes again—is a futile endeavor.

“We’re taught that by thinking harder about the mistakes that we make, we won’t make them again,” Shull says, “but that, actually, isn’t going to accomplish anything, because thinking harder aims to overpower the psyche and that’s something that just isn’t possible.”

Because the human brain is working all the time, Shull says, and no matter how much people may think they may have got the better of their mind, it just isn’t so. As such, individuals would be far better off just trying to understand the various emotions and biases their brains produce, and then, actually working with them as opposed to trying to fight them or conquer them, she says. An individual’s “psychological capital” can actually help them out more in the long term, she says, and in so far as people can figure out what theirs is and go with, it rather than try to get the better of it, the end result for them will be a lot more positive than it would be if they try to adopt a behavior pattern that is not theirs naturally.

“Most of us believe that if we set our emotions aside, we will do better, but instead, we should be thinking about the social and emotional context we take our decisions in so we can better understand why we take those decisions,” Shull says. “We need to be able to analyze those decisions and figure out where they are coming from.”

Shull points to the 2008 financial crisis: As it unfolded with seemingly no end in sight, most people continued to sit tight, either because they had been advised to not let their fear guide their decision, or because they felt this was the more rational thing to do. Finally, “when they couldn’t take things any longer, they ended up quitting, but by then, they had already lost half their savings,” Shull says.

What those folks should have done instead is listened to the inklings of fear they had at the outset and gotten out earlier in the cycle, she says. They should have followed their early emotional signals of fear and anxiety—natural emotions that their brain will always produce—because not doing so ultimately resulted in greater trauma, and that in turn served to hold people back even more from the markets as they returned to normalcy.