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5 Pitfalls of the 'Preserver' Client Type

Loss aversion, status quo, and other behavioral biases can have a wealth-destroying effect on these clients' portfolios.

Michael M. Pompian, 03/27/2014

This month's article is the third in a series called "Deep Dives into Behavioral Investor Types." This series is intended to help advisors create better relationships with their clients by deeply understanding the type of person they are dealing with from a financial perspective and adjusting their advisory approach to each type of client.

As we learned in the last series, there are four behavioral investor types (BITs): the Preserver, the Follower, the Independent, andthe Accumulator. If you missed any of these articles, you can find them in my article archive on MorningstarAdvisor.com.

In this series, I am covering each BIT in three parts:

--Part I will be a diagnosis of each BIT and discussion of its general characteristics 
--Part II will be a deep dive into the biases of each BIT. 
--Part III will be how to create a portfolio for each BIT. 

This article is Part II for the Preserver BIT.

Biases of the Preserver BIT
As previously reviewed, the biases of Preservers are dominated by emotion and manifest as Loss Aversion, Status Quo, Endowment, Mental Accounting, and Anchoring biases. In my experience, I have found that two biases have a substantial impact on the Preserver's behavior:  Loss Aversion and Status Quo biases.

Loss Aversion Bias
Bias Type: Emotional

Preservers tend to feel the pain of losses more acutely than the pleasure of gains, particularly as compared with other behavioral investor types. There are two key contexts in which loss aversion can be seen, and it is important to understand how loss aversion can apply in these situations.

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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