What makes us strong as human beings makes us weak money managers, said Daniel Crosby, Ph.D., president of Nocturne Capital, whose “The Futures is Behavioral” keynote opened the Financial Planning Association in Chicago on Wednesday. He added that fear is hard-wired into the human — and animal — brain, and we have an affinity to be loss averse.
“In the financial markets, what we think we ought to do and what we do are different,” he said. “In times of financial stress people lose 13% of their IQ.”
Further, he noted that “the body has a huge impact on how we make all decisions, including financial decisions.”
He added that we also reason collectively, in which our brain’s sensation and perception area can be changed to see what the collective believes.
“The body is weak, brain is old and outdated, and society ‘truth’ isn’t absolute truth but is what we agree on,” he said. “This impinges on our financial decision making.”
He says there are common behavioral errors that affect our clients’ thinking. These include:
1. Overconfidence or ego: People are especially more positive as a defense factor, he said, especially men, who when surveyed, thought themselves friendlier, funnier and better looking than average. Crosby said the researchers concluded that “the average man seems to think he is two sit-ups away from dating a supermodel.”