Kahneman’s Behavioral Approach
Noise: an unwanted variability in decision-making.
Ask yourself, when am I at my best? Are you a morning person? Are you a “don’t talk to me until I’ve had my coffee” person? Are you a “Mondays stink” but “Fridays are great” person?
Noise isn’t confined to the flood of texts, emails, blinking headlines and social posts. Look inward, that’s another source of noise. If you’re not a morning person, then making a big decision early in the A.M. is probably not the best idea. You might just see things differently in the afternoon or later in the week, or if you read a different news story and get another perspective.
That last bit about reading another news story or getting another perspective in order to combat noise is the crux of Nobel-prize winning psychologist and behavioral financial expert Daniel Kahneman’s newest book, Noise: A Flaw in Human Judgement.
A practical takeaway from Kahneman’s work for financial advisors is this: pay attention to your client’s personality and their personal source of noise. If advisors are going to help their clients navigate the potentially multi-decade investment journey to retirement or other financial goals, then the implication is clear: learn how to reduce noise in an effort to help clients make better, more rational decisions to help grow their assets.
One way to begin reducing noise is to gather information from multiple sources and evaluate the variability of judgements about an issue. If there is a wide range of opinions, then noise is prevalent.
Kahneman advises searching for the middle, or the average, range of opinion as that’s likely where the least amount of noise exists.
Another way to frame it, one that’s specific to financial advisors: delay a client’s gut decision-making until more information and facts can be gathered.
Kahneman also finds evidence that individuals who follow a well-defined process often experience better and more consistent outcomes; doesn’t that sound like validation for the rigorous, personalized, goals-based techniques that are sweeping the financial planning industry? Behaviorally, goals-based plans can be beneficial in helping to reduce emotional decisions.
Eliminating noise, whether as Kahneman defines it or whether it’s the buzz of everyday life, is likely impossible. But clients may see value in the soft skill set of a financial advisor who makes a conscious effort to better understand noise with the aim of helping them make better financial decisions.
Moving into practice: the art of communication
How can an advisor apply behavioral coaching to their clients? It starts with communication.
Studies show that personality has a big influence on how someone prefers to communicate, i.e. to give and receive information. Bernard Poducka is considered the first psychologist to use personality priorities in financial counseling. He argued that being able to understand a client’s motivation behind their decisions, and their main concerns, was an extremely useful insight in providing financial advice and guidance. Knowing a client’s personality type, and their communication preferences, should help the financial advisor’s coaching process affect change in the client’s financial behavior.
To improve their coaching skills, advisors may want to consider incorporating into their initial client learning process personality assessments such as the Myers- Briggs Type Indicator or DiSC® assessment. For behavioral coaching assistance, Financial Virtues or Think2Perform are other resources to consider.
Financial advisors may find understanding their clients’ personality can play a significant role in reducing negative behavior in short-term decisions, which could go a long way in helping someone reach the long-term goals they’ve set.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. This material does not contain sufficient information to support an investment decision and it should not be relied upon for investing purposes. The opinions expressed here are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.
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