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Behavior Survey: Conservative Investors With Advisors

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

Michael M. Pompian, 12/16/2010

We have been reviewing the results a survey 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 that 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 conservative investors.

Loss-Aversion Bias
Bias Type: Emotional
Bias Description: Some investors feel the pain of losses more than the pleasure of gains as compared to other client types. As such, these investors may hold only losing investments too long--even when they see no prospect of a turnaround. Below is the survey question related to loss-aversion bias.
(View the related graphic here.)
Commentary: Given the fact that we are dealing with PEM-FA investors in this part of the survey, this results is somewhat surprising. I would have expected the number who would hold and get back to even to be lower than 57%. Why? Because financial advisors should be advising their clients to rationally look at a situation and cut a losing investment and move on. With 57% of survey takers seemingly subject to loss aversion, this demonstrates that even investors who use financial advisors can still become quite affected by loss aversion bias.

Status Quo Bias
Bias Type: Emotional
Description: Some investors prefer to keep their investments (and other parts of their life for that matter) the same or keep the "status quo." A direct application of this bias is the following question.
(View the related graphic here.)
Commentary: This is a very encouraging sign and somewhat expected of PEM-FA investors. They are getting good advice from their financial advisors given that 90% prefer a buy-and-hold strategy. This tells me that this group has discipline and doesn't waste money on trading costs. Moreover, they tend not to get emotional about their investing especially during times of market turmoil.

Endowment Bias
Bias Type: Emotional
Bias Description: Some investors assign a greater value to an investment they already own (such as a piece of real estate or an inherited stock position) than they would if they don't possess that investment and had the potential to acquire it. Below is the survey question related to endowment bias.
(View the related graphic here.)
Commentary: As I was with non-FA PEM investors, I am skeptical of the large number of "no" answers to this question. It is common for survey takers to answer questions how they think they should answer questions as opposed to how they actually behave. With that said, this is an encouraging sign that even if some portion of the 78% of survey takers weren't genuine in answering that they don't get emotional about possessions or investments, they recognize that they shouldn't get emotional.

Regret-Aversion Bias
Bias Type: Emotional
Some investors avoid taking decisive actions because they fear, in hindsight, that whatever course they select will prove less than optimal. Regret aversion can cause some investors to be too timid in their investment choices because of losses they have suffered in the past.  The following is the question regarding regret-aversion bias.
(View the related graphic here.)
Commentary: Given that this subset of survey takers works with advisors, I would have expected a slightly lower number of people to say that they had regret bias. Regret is something that is quite common with investors but advisors should be able to mitigate it. However, there are a good number of PEM-FA investors who clearly look at investing as a probabilistic endeavor and don't let regret cloud their judgment. Way to go!

Anchoring Bias
Bias Type: Cognitive
Some investors are influenced by purchase points or arbitrary price levels, and tend to cling to these numbers when facing questions like "should I buy or sell this investment?" Suppose that the stock is down 25% from its high that it reached five months ago ($75/share vs. $100/share). Frequently, conservative clients will resist selling until the price rebounds to the $100/share that it achieved five months ago.
(View the related graphic here.)
Commentary: This result is not surprising to me even for clients who use advisors. I would expect greater than 50% of these survey takers would answer this way because anchoring is a common bias. It is good to see that a third of investors are getting good advice and have the discipline to sell and move on.

Mental Accounting Bias
Bias Type: Cognitive
Many investors treat various sums of money differently based on where these sums are mentally categorized. For example, PPs often segregate their assets into safe "buckets." If all of these assets are viewed as safe money, sub-optimal overall portfolio returns are usually the result.
(View the related graphic here.)
Commentary: This is not a surprising result, given that PEM-FA survey takers have advisors that can help their clients look at their portfolio as a whole rather than in parts. Some clients naturally do this even if they work with an advisor, so I would have expected some mental segmenting of money--but this amount is still small percentage wise. The explanation is likely that "experienced" investors have a single portfolio generating income to live on and have already dealt with tasks such as saving for college.

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