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Behavior Survey: Aggressive Investors With Advisors

More results from our attempt to connect real people with behavioral finance theory.

Michael M. Pompian, 03/17/2011

We have been reviewing the results a survey that I created in February 2010 that was completed by 980 individual investors who subscribe to either Morninstar.com and/or Morningstar investor newsletter publications. The purpose of the survey was to gauge investing behavior and choices and how influential these choices are in the investment decision-making process.

The survey was also done to learn more about the four behavioral investor types that I developed (that we have been reviewing over the past two and a half years) and how financial advisors can be better prepared to work with them. Of the 980 surveys that were completed, 308 were completed by investors who use financial advisors. Here we will be reviewing answers to bias questions of investors using financial advisors.

This information can be highly relevant to advisors in their quest to serve clients in the best way possible. It is important to remember that the Morningstar investor survey is composed of a very specific type of investor population so let's review that now. (More details on the survey can be found in the original article.)

The population of survey takers in the Morningstar universe was generally defined as "mostly male, mostly experienced (experienced having a double meaning here--experienced in the sense that they are not new to investing and experienced in the sense that that over half of the survey takers were over 60 years old), and mostly do-it-yourself" investors. What this means is that the majority of survey takers were proactive, engaged and self-directed investors which, naturally, is only a subset of all investors. The populations of survey takers that use financial advisors are likely to be somewhat less self-directed but we can assume since they subscribe to Morningstar services, they are still somewhat self-directed. It is important to remember not to extrapolate what is learned in this set of articles to the general population of investors because it contains many passive and/or unsophisticated investors as well as "middle of the road" investors who are somewhat engaged but don't have the time or aptitude for more. And of course, the general population of investors contains a higher percentage of women and young investors. For simplicity, I will call the investors who took the survey that use financial advisors "PEM-FA investors" going forward to stand for proactive, experienced, and male investors who use financial advisors. We will now review the biases of growth-oriented investors.

Biases of Aggressive Investors
Overconfidence Bias
Bias Type: Emotional
Bias Description:
Overconfidence is best described as unwarranted faith in one's own thoughts and abilities. Overconfidence manifests itself in investors' overestimation of the quality of their judgment. Many aggressive investors claim an above-average aptitude for selecting investments; however numerous studies have shown this to be a fallacy. Below is the survey question related to overconfidence bias.
(View the related graphic here.)
Commentary: Given the population of investors answering this question, this result of approximately 60%/40% is somewhat unexpected because many investors who work with financial advisors should know the benefits of sticking to a long-term plan. For example, the March 2009 lows were quickly erased in a very short time. Those who were advised to stick with their plan saw their portfolios bounce back nicely. I would have expected a lower number of respondents answer the question saying they change their portfolio in response to changing market condition. Perhaps it is due to the do-it-yourself nature of the people taking the survey. In any case, advisors need to be aware of situations that clients may change their portfolios only to see the opposite of what they had intended to do occur.

Self-Control Bias
Bias Type: Emotional
Bias Description:
Self-control bias is the tendency to consume today at the expense of saving for tomorrow. The primary concern for advisors with this bias is a client with high risk tolerance coupled with high spending. For example, suppose you have an aggressive client who prefers aggressive investments and has high current spending needs and suddenly the financial markets hit severe turbulence. This client may be forced to sell solid long-term investments that have had been priced down due to current market conditions just to meet current expenses. Below is the survey question related to self-control bias.
(View the related graphic here.)
Commentary: This answer shows that PEM-FA investors have good self control. This is a good thing because people are living longer, will have medical bills to pay for, for longer and so on. This question might have been answered quite differently two to three years ago. Most all investors are acutely aware of the need to increase savings.

Optimism Bias
Bias Type: Emotional
Bias Description:
Many aggressive investors believe that bad investments will not happen to them--they will only afflict "others". Such an illusion can damage portfolios because people fail to mindfully acknowledge the potential for adverse consequences in the investment decisions they make. An example of optimism bias is when employees allocate a high proportion of their 401K plan as their company's stock because they think they know their company better than others and feel more confident in its prospects. Below is the survey question related to optimism bias.
(View the related graphic here.)
Commentary: About 10% more PEM-FA respondents answered that they tend to look at the positive aspects of an investment versus PEM- NO FA. This is a significant difference. It may be explained by the fact that those that work with FA's feel as though their advisor has researched investments that they are proposing to them and therefore clients can feel confident about the recommendation. However, advisors who work with overly optimistic investors need to reflect on why they are so optimistic and advise their clients adjust their behavior accordingly.

Illusion of Control Bias
Bias Type: Cognitive
Bias Description:
The illusion of control bias occurs when people believe that they can control or, at least, influence investment outcomes when, in fact, they cannot. Aggressive investors who are subject to illusion of control bias believe that the best way to manage an investment portfolio is to constantly adjust it. For example, trading-oriented investors, who accept high levels of risk, believe themselves to possess more "control" over the outcome of their investments than they actually do because they are "pulling the trigger" on each decision.  Below is the survey question related to Illusion of Control bias.
(View the related graphic here.)
Commentary: Perhaps the wisdom of this group of PEM-FA investors who took the survey is showing through. I would have expected more people to want to pick their own numbers. But this group clearly understands that with lottery, as with investments, is largely a probabilistic endeavor. For those who like to pick their own numbers, be advised that this is largely a fruitless exercise.

Hopefully you have learned something about how PEM-FA investors are biased and how you might begin to think about counseling them when you encounter these biases. In next month's article, we will be reviewing how PEM-FA investors answered behavioral questions related to their relationship with their financial advisor.

Michael M. Pompian, CFA, CFP, is an investment consultant to ultra-affluent clients and family offices and is based in St. Louis. His book, Behavioral Finance and Wealth Management, is helping thousands of financial advisors globally build better relationships with their clients.


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