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Financial Planning > Behavioral Finance

Second Thoughts: Making Better Decisions

By Olivia Mellan, Sherry Christie

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This article is the second in a series on using knowledge about the brain to help clients thrive. Visit our Your Client’ Brain home page for related coverage throughout March.

Last month in Investment Advisor’s cover story, “Double Think,” we explored the curious structure of the human brain, whose “two minds” can turn decision-making into a dilemma. If a client’s rational mind and emotional mind are divided about a decision, how can an advisor help? After all, whether you’re legally a fiduciary or not, your job is to guide clients toward making the right decisions on everything from college to retirement to estate planning.

Making good decisions is not a matter of heeding one “mind” and ignoring the other. “The brain is designed to work as a whole, integrating its analytic and emotional capacities,” said neuropsychologist Rick Hanson. “If someone is upset or rattled about money, they tend to swing too far in one direction or the other. The best approach takes a middle path in which we use both head and heart.”

In other words, when messages from the two minds are contradictory, we need to arrive at a resolution that integrates them. San Francisco psychotherapist Linda Graham noted that integration is the job of the prefrontal cortex, which receives verbal and nonverbal input from both hemispheres of the brain. Anxiety disrupts this process by prompting the amygdala to flood our brain and body with the stress hormone cortisol, putting the prefrontal cortex out of commission.

The perceived threat may be just a rude driver cutting across traffic, but we react as viscerally as if we’d stepped on a cobra. “Our judgment is temporarily impaired, reality testing is impaired, and we literally can’t think straight,” said Graham, who specializes in the integration of neuroscience, mindfulness and relational psychology, and who wrote the soon-to-be-published “Bouncing Back: Rewiring Your Brain for Maximum Resilience and Well-Being.”

With chronic stress a real problem in modern society, stress management techniques are helpful, even necessary, to ensure the prefrontal cortex functions well. Techniques like Graham’s Hand on the Heart (stay tuned to AdvisorOne.com for more on stress relief techniques) can prompt the prefrontal cortex to calm the fear-stress-threat response. “Calming and centering help head and heart work together,” as neuropsychologist Hanson, author of “Buddha’s Brain: The Practical Neuroscience of Happiness, Love and Wisdom,” put it.

In this second part of our series—and in a wealth of articles and other resources on AdvisorOne.com—we offer 13 rules to de-stress decision-making (DDM). These rules use the latest findings from neuroscience to identify ways you can work with clients and run your business more effectively.

DDM Rule 1: Avoid making decisions under stress

The Science | We tend to break this rather obvious rule because we overestimate our ability to make rational decisions. According to David Rock, the New York-based executive director of the NeuroLeadership Institute, we may have only a few hours a week of quality thinking time to make difficult financial decisions because the prefrontal cortex (the center of conscious decision-making) is surprisingly small and tires very easily.

The Recommendation | Since our conscious processes are so limited, advisors should educate their clients to consider tough decisions when they are mentally rested. The worst thing they can do is make a financial decision when they are tired or stressed at the end of a busy week.

DDM Rule 2: Embrace your clients’ goals

The Science | Many financial advisors “fail to ‘de-bias’ their clients and often reinforce biases that are in their [own] interests,” reported an undercover survey done in early 2012 for the National Bureau of Economic Research.

The Recommendation | Probe for clients’ real needs and goals; don’t just cater to their expressed wants. Rock pointed out that when you understand and share your clients’ goals, you will perceive their challenges more robustly, have natural compassion for their experiences and be more motivated to help them. When people perceive your empathy, they will become more likely to open up their real thoughts and feelings to you.

In other words, taking the time to really understand and connect with your clients’ goals will make your job easier—and probably more successful.

DDM Rule 3: Know your own limitations

The Science | “If there are contradictions and confusions in the client, sometimes the advisor’s prefrontal cortex tries to act on behalf of the client’s prefrontal cortex,” said psychotherapist Graham. “The advisor needs to be coming from an integrated perspective, not privileging ‘rational’ over ‘emotional.’”

The Recommendation | Besides not imposing your own logic on the client, it’s important to understand what’s going on in your emotional brain, commented mental health counselor and speaker Dave Jetson. “We all have our emotional history and the limitations that come from that,” he said. “If your fears are limiting your interaction with a client, it may help to have a therapist in the session with you, or another planner who doesn’t have the same emotional response to the client’s issues.”

For example, Jetson said, “Suppose an advisor has a history of being yelled at as a child. If he is still traumatized by this history, when he meets an aggressive client, he may make concessions in developing the portfolio that aren’t in his or the client’s best interest.”

In other words: Advisor, heal thyself. Don’t allow your own issues to complicate your clients’ decision-making.

DDM Rule 4: Move beyond clients’ emotional triggers to discover their deeper feelings

The Science | “Our unresolved issues create major stress in our lives,” Jetson observed. “Calming exercises may help in the present, but they don’t guarantee that a successful shift will occur. Exploring patterns associated with the emotional brain can be more helpful in creating success.”

Jetson noted that yoga, exercise, meditation, contemplation and art therapy are all good ways to lower stress levels. “But you need to work through your deeper feelings to get emotional release,” he said. That means sharing them with a family member, a spiritual advisor or someone else you trust.

Co-owner of Jetson Counseling with his wife, Liz Thorn, Jetson partners with planner Rick Kahler to provide financial therapy for clients. “While they’re looking over their portfolio in the office, I’m observing their body language, their behavior and other signs of resistance,” he explained. “I look for patterns about what helps them feel valued and successful, what they’ve done in the past that has worked or not worked.”

The Recommendation | Incorporating the client’s own emotional programming in a plan helps ensure that the client will take action and succeed.

Jetson gives Kahler information about what needs to be incorporated into the financial plan to be successful. “This collaboration helps us make sure we’re giving the best service to our clients,” he said. “For example, suppose Jane has learned that the only way she can be successful is as an entrepreneur, but she’s getting close to retirement. I might suggest we put something in her plan that recognizes she’s still going to be active, maybe starting a nonprofit organization or taking the lead in a volunteer activity.”

DDM Rule 5: Learn how to read clients’ faces

The Science | When we asked therapist Graham how a financial advisor can learn to recognize stress in a client, she suggested psychologist Paul Ekman’s F.A.C.E. (facial expression, awareness, compassion, emotions) training.

Ekman, a pioneer in the study of nonverbal communication, has identified seven emotions common across cultures: anger, disgust, fear, happiness, sadness, surprise and contempt. His online courses train people to identify these emotions in the facial expressions of others.

The Recommendation | The more accurately you can read microexpressions, the better you will know when to reassure a client, mitigate their sadness or defuse frustration or anger.

DDM Rule 6: Discuss important decisions in person

The Science | Graham noted that when we make eye contact with someone who is calm, a structure in the right hemisphere of our brain (the fusiform gyrus) recognizes this calmness in the other person’s facial expression. This in turn correlates with a calming of the fear response in our own amygdala.

What happens, we asked, if client and advisor avoid eye contact? There are other ways to communicate nonverbally, of course, but Graham noted that 55% of all emotional communication happens through facial expression, tone and rhythm of the voice; 38% through body language; and the remaining 7% through words, according to Albert Mehrabian, UCLA professor emeritus of psychology. “Without eye contact,” she concluded, “you’re losing half of this source of feedback.”

The Recommendation | Learn as much as you can about nonverbal communication. Clues from eye contact and unconscious facial signals are a good reason to invite clients to talk face-to-face, rather than leaving it to a telephone call or email.

DDM Rule 7: Adjust to each client’s brain style

The Science | Research has shown that people process information in different ways—e.g., verbally, pictorially or kinesthetically (physical movement).

The Recommendation | To find out the best way for a particular client to hear you (or for a couple with divergent views to hear each other), you might explore whether they learn better through discussion or via graphs and charts; in a group or one-on-one; moving around or stationary.

DDM Rule 8: Identify and label your own emotions

The Science | The better we understand the brain, the more effectively we can manage our emotions. Simply trying to suppress them tends to make them intensify over time.

The Recommendation | “The best thing you can do is to learn to label your emotions, which means to summarize in a few words what you’re experiencing,” observed David Rock, who wrote “Your Brain at Work: Strategies for Overcoming Distraction, Regaining Focus, and Working Smarter All Day Long.”

For example, if you are feeling anxious about a presentation to a difficult client, you could say to yourself, “I’m anxious because of this client meeting” rather than trying to suppress your feelings. Labeling the cause of your anxiety will help reduce it, Rock said.

Even more effective would be to “reappraise” or reframe your prediction of events—in other words, to change the way you interpret things. In this case, you might put a positive spin on the meeting by thinking about ways you can help this client. Labeling reactions, then reappraising them, is an excellent technique for managing your emotions.

DDM Rule 9: Use the power of storytelling

The Science | Telling stories to ourselves and to one another is a powerful determinant of how well-integrated our two minds are. Neuroscience researcher Jaak Panksepp of Bowling Green State University has described a “seeking system” in the brain: an inner urge to discover and learn, to understand, to satisfy our curiosity about where we come from, who we are, how we developed and what we’re made of.

The Recommendation | Listening to your clients’ money histories and the way they make sense of these experiences is an important part of deepening your connection with them. As a “therapeutic educator,” you can help them reframe their stories in a way that is less emotionally triggering. As David Rock observed, labeling and reappraising your emotions allows you to see things in a context that may work better for you in the future.

DDM Rule 10: Don’t discount emotion in decision-making

The Science | It’s tempting to assume that a gut response to an issue can’t be right because it conflicts with a logical weighing of the pros and cons.

But emotion is a vital part of decision-making. As we were reminded by Portland, Ore.-based therapist Bonnie Badenoch, “if our rational way of knowing is cut off from the emotional part, any decision we make may be overly optimistic and lacking in human values.”

The Recommendation | The important thing is becoming conscious of both parts and that they are in conflict. “Sometimes from that place it’s easier to tease out whether the more emotional response is tied to some form of earlier learning,” Badenoch added, “or if that intuitive part [of the brain] is actually sensing something helpful for this present moment.”

DDM Rule 11: Learn the lessons of behavioral finance

The Science | As most advisors know, clients facing the decision of whether to hold onto or sell an investment are biased in favor of its previous value, rather than its present and future value.

“Making people aware of their buying behavior and short-term decision-making process is valuable to them. They may not be aware that the reason they paid a certain price for something is that a marketer put a high-priced item and a low-priced item near it, so they chose the middle.”

The emotional brain’s focus on short-term risk and reward is another hurdle that advisors can help clients overcome, Greenberg said. “The reason they need a long-term plan is so that they can avoid these pitfalls.”

The Recommendation | Paul Greenberg, a professor of psychology at Brandman University in San Diego, recommends advisors be aware of these decision-making biases. “Read Dan Ariely’s ‘Predictably Irrational’ or Daniel Kahneman’s books,” he urged.

DDM Rule 12: Practice ways to overcome bouts of anxiety

The Science | “Remember, the first, most primal emotion was fear,” neuropsychologist Rick Hanson reminded us. “Our ancestors needed to eat lunch, not be lunch.” Knowing that fear and the need for security trump everything else, an advisor should pay attention to clients’ anxiety and continually try to reduce their fears so they can think clearly.

The Recommendation | Hanson suggested these three tips for dialing down stress:

  1. Take several breaths in which the exhalation is twice as long as the inhalation. Exhaling activates the parasympathetic nervous system, which calms down the fight-or-flight, sympathetic wing of the nervous system.
  2. Notice that you are actually all right at this moment. This observation accesses the ongoing internal signals from your body to your brain that all is well.
  3. Think about someone who loves you and savor the sense of feeling cared about. “In ancient times, exile from the band was a death sentence, so it’s reassuring and re-centering for us to feel connected with loved ones,” Hanson noted.

DDM Rule 13: Foster a climate of safety and empathy

The Science | There are a number of good breathing exercises and other mindfulness practices like Rick Hanson’s that help lower stress. “But I think the most effective thing to cultivate is a warm, safe, empathic relationship,” therapist Bonnie Badenoch told us, “because when we feel safe, our entire system calms down.”

Neuroscientists agree with Badenoch’s suggestion. “To reduce stress, you want to provide a situation where the client is physically relaxed and comfortable,” said psychology professor Greenberg. “Your office is a controlled environment where you get to attend to customer service.”

The Recommendation | Does your office welcome clients, or is it chilly and intimidating? “You want the office to seem inviting, uncluttered and comfortable, a place where they don’t feel rushed,” Greenberg suggested. 

Don’t overlook the effect on already-stressed clients of busy wallpaper, stiff chairs or flickering monitors. In fact, you may want to do some research on soothing decor.

“De-stressing has a hormonal effect on the body,” Greenberg said, “and that will affect how well the client listens to you. Getting them in the right frame of mind means putting them in the right frame of body.”

In an early discussion of neuroscience evolution, therapist and author Marcia Stern noted that in contrast to therapy where insights are often forgotten when clients go home, “helping people understand their own brains and the unique way they process information can help bridge that gap and make changes stick.”

While expanding your knowledge of the brain and stress-management practices, we hope these articles and the resources online will enable you to educate your clients about their own decision-making processes.

When people who are stressed out from everyday pressures or old traumas consult you, your understanding and alignment with their goals can comfort them and help open new neural pathways for better decision-making.

At the same time, you may need to make changes in your own thinking. Consider developing a regime of mindfulness, whether it’s profound meditation or simply noticing what you’re feeling. “Mindfulness strengthens the prefrontal cortex and improves our capacity to focus attention,” as Linda Graham reminded us.

By keeping anxiety from hijacking your clients’ brains (or your own), you’ll create healthy relationships leading to stronger connections and more security and serenity for your clients and yourself. 

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