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The Blue Screen of Death in Financial Decision-Making

Fear is inevitable, so removing the ambiguity that causes that fear should be your approach with clients.

Justin A. Reckers and Robert A. Simon, 09/15/2011

hink we can all recall a moment in our lives when the personal computer has been more of a handicap than an asset. As Windows and other operating systems developed over the last thirty years there have inevitably been bugs in the system, or ghosts in the machine depending up on your level of belief in conspiracy theory. One of the main bugs that we can all remember is what came to be known as the Blue Screen of Death. Actually the Blue Screen of Death was more a reaction to a bug then a bug itself. The Blue Screen of Death is the error screen displayed by Microsoft Windows operating systems upon encountering a "critical error." In computer speak it is known officially as a Stop Error. The term is named after the color of the screen generated by the error. Stop Errors cause the computer to stop responding in order to prevent damage to the hardware.

Does the explanation of a Stop Error sound familiar? Have you ever witnessed the exact moment when your client mentally checked out of a meeting? In financial decision making the Stop Error message is sent by your client's brain. In the presence of risk and uncertainty the human brain is hard wired to protect itself. The Stop Error message from your client's protective instinct tells them to stop responding to decision-making prompts in order to prevent damage. We find it eerily strange to imagine the artificial intelligence of even early personal computers to be so similar to the evolutionary intelligence of the human mind. Write a comment to let us know just how scared you are of the artificial intelligence someday controlling the world.

The point of our article is not to spout conspiracy theory or spew science fiction laden conjecture about robots ruling the world. It is to draw the advisors attention to the observations we can make about the financial decision making of our clients and offer Behavioral Finance based concepts to help advisors make the positive changes necessary for their clients to make financial decisions the way a human mind was meant to, rather than the way of a computer or Homo Economicus.

So why do advisors often encounter the Blue Screen of Death when working with clients in difficult financial decisions? Fear is the most common and most crippling cause of the Blue Screen of Death but what causes the fear and what brings it to the table in financial decisions? Aversion to Ambiguity is one of the most common fear inducing barriers we observe in financial decision making. Ambiguity often amounts to an unknown outcome which equates to an unknown future. The aversion to ambiguity as we experience it with clients often amounts to a cognitive barrier that manifests as the emotional reaction we recognize as fear. It turns clients into passive decision makers or induces enough fear to completely derail the decision making process and cause the Blue Screen of Death.

Our clients will, if educated and re-enforced, admit that uncertainty is part of the financial planning process. Signing up as a client in the first place required him to recognize the fact that uncertainty and ambiguity existed. He recognized at that moment the only way to control these complicating factors was to plan for them. Why then would a client be afraid of uncertainty and exhibit an aversion to ambiguity?

Fear of the unknown can be crippling in all parts of life. Asking for a promotion, scuba diving for the first time and speaking in public all strike fear in the hearts of many adults. All of these have uncertainty as there complicating factors. What will happen if something goes wrong? What if I get fired? Many learn to push off these kinds of fears by saying: What is the worst that could happen? If you are asking for a raise chances are you believe you are not fairly compensated for the value you provide. Getting fired after all may not be that bad if you feel you are treated unfairly. Assuming you are being responsible you will have insured a qualified teacher was on hand when learning scuba diving. The teacher will be well-qualified in life saving techniques. You might have a moment of panic but you are not likely to be fatally injured. Speaking in public may just take a vote of confidence. It is helpful to recognize that an invitation to speak to a group is a good indication the group considers you to be somewhat of an expert. The worst case is that you stumble over a section and have to ad-lib. We have found that moments like these are some of the best creators of innovation and new thoughts in our work.

The examples given together with their mitigating thought processes all demonstrate one concept. They all recognize the fear before trying to fix it. You will fail if you try to remove the fear created by uncertainty and ambiguity. Instead focus on removing the uncertainty and ambiguity by recognizing it exists and brainstorming the scenarios it may create. The examples given above all recognize the fear by delineating it in worst-case scenarios. Start with the worst case then work your way back to the likely outcomes. This process will remove ambiguity, recognize uncertainty, require dynamic thinking on behalf of your client and recognize the fear so the client is not left outside looking from behind the Blue Screen of Death.

We will continue our Applied Behavioral Finance series next month with a Holiday themed topic to kick off the season's shopping in October followed by some incredible and sobering real world examples of how others may be taking advantage of you and your clients' economic irrationality.

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Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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