Last month, I discussed a new field called Socionomics, which tracks movements in response to social mood, both euphoria and discouragement, optimism and pessimism. Your clients emotionally respond to these seismic financial changes. I further detailed two traps your seniors may find themselves in without the benefit of your financial guidance and counsel: Status Quo Bias and Sunk Cost Fallacy.
Here are three more traps senior clients may be vulnerable to.
Mistake No. 1: “I am going to keep my money in the market. It is moving up and I want to recover my losses.”
This stupid investment mistake is called Confirmation Bias. There is a great tendency for seniors to look for information that confirms their beliefs, rather than data that falsifies it.
Cornell marketing professor Ed Russo did a project with students evaluating restaurants. They rated restaurants on a 1-10 scale, 10 being the most positive. The ratings were based on menus and photos. But when the differences were mentioned one at time with photos of problem areas like rips in the booths and dirty kitchens, the students stayed with the initial ratings. They discounted information that didn’t fit with their first impressions.
The fix: Tell them about Confirmation Bias and talk about information that refutes their views. But then produce stories about other clients who came to you with the wrong ideas and succeeded as a result of following your advice.
Mistake No. 2: “I don’t like totally safe investments right now. I am getting back in. Look at how much the market has gained!”