New survey analysis will look to identify key primary and secondary behavioral biases to give advisors a leg up on managing them.
This month's article starts a new series about managing behavior in a volatile market. The new series will provide data and insight into not only identification of key behavioral biases that your clients are likely to exhibit but also how to manage this behavior and emotion in this highly volatile market climate.
A substantial part of this series will be a review and analysis of answers to behavioral questions that were completed by a diverse set of 178 individual investors in 2011. The investors polled were not subscribers to Morninstar.com and/or Morningstar investor newsletter publications like the last survey, but they fit a similar profile in terms of investment objective and investor description. At the end of this article I will provide some demographic and other descriptive information on the survey-takers.
The survey questions were written to identify 20 key behavioral biases that I outline in my book "Behavioral Finance and Wealth Management."
The intent of the survey was twofold. First, I wanted to identify the most commonly occurring biases ("Primary Biases") so that advisors would know what to look for more easily when working with their clients.
Secondly, I wanted to identify what less prominent behaviors ("Secondary Biases") might also be lurking behind these primary biases. To use a simple example, if client ABC has easily recognizable bias X, what other of the 19 biases asked in the survey might Client ABC also be subject to?
The purpose in doing this research is that advisors can hopefully anticipate, based on recognition of a primary bias, what other biases a client might be subject to and manage the situation before the effect of the bias has taken hold. Often it is the unrecognizable biases that can cause substantial harm when attempting to keep clients on track to attain their financial goals. Advisors can hopefully gain significant insight into a range of a client's behavioral tendencies simply by being aware of a single common bias.
In order to rank as a primary bias, 50% or more of respondents needed to answer at least "Agree" or "Strongly Agree" to a question designed to identify a given bias. There were seven biases that garnered at least 50% positive responses; these were the following:
A key idea embedded in the interpretation of the research is that if the same distribution of responses were applied to an advisor's client base, probability says that 1 out of 2 clients will be subject to these biases. Naturally, it will not be this easy or uniform with a real client base. Wouldn't you like to know what other biases a client is likely to have if they are subject to hindsight bias? Or loss aversion? Or any of the biases listed above?
The next seven articles will cover these seven biases in detail. Revealed in these articles will not only be survey results and discussion on managing the effects of these key biases but also identification of the "secondary" or less easily recognizable biases that can also affect investment decision making.