In the book, “The Genetics of Investment Biases,” authors Henrik Cronqvist and Stephan Siegel claim that genetics can explain up to 45 percent of some investment bias. Does that mean we can blame our parents for our investment misses? Of course not. Maybe nurture and nature play a role, but what plays a bigger role in investment decisions are our own biases.
Some biases are more pronounced than others in times of market volatility. What many in our industry learned after the Great Recession is that clients seek our guidance in these uncertain times. So, we know that it is the right time to call our clients and talk through their concerns. Knowing how these biases are impacting your clients may provide you with insight that can help your life insurance business.
Here are three “irrational” investment behaviors and how they can lead to life insurance discussions:
1. Anchor bias: During a down market savers can suffer a negative anchor bias, which means they focus on this negative reference point and use it to make future decisions. “When people anchor on a bad investment event, they can be extremely risk-averse,” said Professor Victor Riccardi of Goucher College in a recent USA Today article. Anchor bias may be more pronounced in the face of uncertainty. Does the current market volatility portend that consumers will consider protection more seriously? I believe it does. In a 2009 survey, when adults were asked if the Great Recession made them more interested in financial protection for their family, more than 80 percent said yes. Seize on this.