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Seven Emotional Biases Financial Advisors Need to Know

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Seven Emotional Biases Financial Advisors Need to Know

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We don’t always make the most rational decisions. We have
constraints, and our comfort levels vary in response to
uncertainty, which is not considered in traditional economics.

We don’t always make the most rational decisions. We have
constraints, and our comfort levels vary in response to
uncertainty, which is not considered in traditional economics.

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Seven Emotional Biases Financial Advisors Need to Know

  1. 1. Financial Advisors Need to Know 7Emotional Biases September 2017
  2. 2. All humans are likely to hold some “biases,” which just means: We don’t always make the most rational decisions. We have constraints, and our comfort levels vary in response to uncertainty, which is not considered in traditional economics.
  3. 3. Biases are generally classified as either: Cognitive biases are caused by errors in calculation or faulty reasoning. COGNITIVE EMOTIONAL Emotional biases come from “impulse, intuition, and feelings.”
  4. 4. ©tamuc via Flickr Though biases cannot be eliminated, your ability to distinguish between which clients will benefit more from education and which clients are more prone to feel uncomfortable with loss/missed opportunities, will help you achieve better outcomes for your clients.
  5. 5. An understanding of the different types of biases equips you to manage investment plans more appropriately and communicate more effectively with your clients. While education can work more quickly to address cognitive biases, emotional biases are often more persistent because their actions are based upon feelings rather than facts.
  6. 6. 7different emotional biases that you should look for in your clients. Here are
  7. 7. Endowment 1 Investors value an asset more when they possess it and are faced with losing it than when they don’t possess it and have the potential to gain it.
  8. 8. Investors tend to strongly prefer avoiding losses, as opposed to achieving gains. Psychologically, the possibility of a loss is twice as powerful a motivator as the possibility of a gain of equal magnitude. Loss Aversion 2
  9. 9. Regret Aversion Investors tend to avoid making decisions out of fear that the decisions will turn out poorly. 3
  10. 10. Overconfidence Investors are more confident in their own decisions & abilities than is objectively warranted. 4
  11. 11. Investors tend to take credit when an investment goes up, Self-Attribution but blame outside factors when an investment goes down. 5
  12. 12. Investors tend to have a lack of self-discipline when it comes to making financial decisions. Self-Control 6
  13. 13. Status Quo Investors tend to do nothing instead of making a change. These clients prefer the comfort of keeping things the same, even when a change would be beneficial. 7
  14. 14. 7Biases Where do your clients fall? Endowment1 Loss Aversion2 Regret Aversion3 Overconfidence4 Self-Attribution5 Self-Control6 Status Quo7
  15. 15. Our Behavioral Risk Survey is designed to surface each client’s behavioral biases and willingness to take risk, which combine to determine their unique investor persona. Then, our communication helps you easily navigate their biases to improve their outcomes and grow your business. Schedule a Demo to Learn More Find out with Finworx!
  16. 16. Contact Us: 9202 S. Northshore Drive Suite 300 Knoxville, TN 37922 865.243.8000 finworx.com © 2017 Lirio, LLC. All rights reserved.

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