• / Free eNewsletters & Magazine
  • / My Account
Home>Practice Management>Practice Builder>Managing Clients' Loss Aversion

Related Content

  1. Videos
  2. Articles
  1. A Less-Jolly Holiday for Retailers?

    Holiday retail sales growth should decelerate this year as consumers' pent-up demand is tempered by uncertainty over the markets and stagnant wage growth, says Morningstar's R.J. Hottovy.

  2. Be Careful With This New Crop of Bond Funds

    Absolute return, long/short, and unconstrained bond funds--part of Morningstar's new nontraditional bond category--aren't ready to be the core portion of investors' fixed-income asset allocation, says Morningstar's Eric Jacobson.

  3. Morningstar's Guide to College Planning

    Get the facts on the high cost of higher education, college-savings strategies, 529 plans, financial aid, and student loans in this special web seminar hosted by Morningstar's Adam Zoll.

  4. How to Make the Most of Your 401(k)

    In this special presentation, get the answers to key questions about the quality of your plan, whether your savings are on track with your goals, how to allocate assets, and what to do with assets when you leave your job.

Managing Clients' Loss Aversion

Clients who exhibit loss aversion may be subject to several other irrational biases. Here are some tips for addressing them.

Michael M. Pompian, 11/17/2011

This month's article is the second in a series called "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 environment.

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 Morningstar.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.

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 prevalent biases ("Primary Biases") so advisors would know what to look for when working with their clients. Secondly, I wanted to identify what secondary behaviors ("Secondary Biases") might also be lurking behind these primary biases. In other words, if client Smith has easily recognizable bias X, what other of the 19 biases might Smith also be subject to?

The purpose in doing this is that advisors can hopefully recognize not only primary biases, but secondary biases as well. Often it is the unrecognizable biases that can cause substantial harm when attempting to keep clients on track to attaining 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:

Loss Aversion Bias: the pain of losses is greater than the pleasure of gains

Anchoring Bias: getting "anchored" to a price point when making an investment decision

Hindsight Bias: believing that investment outcomes should have been predictable

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

©2017 Morningstar Advisor. All right reserved.