Ep # 38: Recognizing That Our Biases Affect Our Financial Decisions
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Benjamin Haas 00:02
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!
Adam Werner 00:27
Hi Ben, how are you?
Benjamin Haas 00:31
I am good. How are you today, Adam?
Adam Werner 00:34
I'm doing great. Obviously, my level's like up here and you're like, Hey, how are ya?
Benjamin Haas 00:40
I'm in a good mood. I can ramp it up a little bit. You want me to dial up the energy?
Adam Werner 00:47
We joked earlier, maybe for next April Fool's we'll have a podcast here where we're just like, really angry at each other and we disagree the entire time.
Benjamin Haas 00:58
Yeah, let's see if we can remember that 10 months from now.
Adam Werner 01:01
Devon, note it. So today a little bit different of a topic. Maybe not different for us, but less technical going into the more psychological side of what we do and the human side. The CFP board recently added another discipline to those CFP's either looking to get the designation or for us for continuing education. It's insurance, investments, estate planning, taxes, that was kind of the traditional model and now they've added one that is the psychology of investing, right behavioral finance. So we're going to spend a little bit of time talking about that and kind of how we use that in practice.
Benjamin Haas 01:46
Yeah, I hope we are not in the minority there. This is something that I've become a whole lot more passionate about and think our industry needs to actually embrace because I think we certainly take an approach that is not just, I don't want to pick on other advisors that do things a certain way but that have a sole focus on investments. When we talk to clients about goal orientation and getting from A to B and like being true partners, it's recognizing that traditional finance needs to be paired with behavioral finance. So I guess I should just take a short step back. Traditional finance really is just based on fundamental things that people have clear and consistent preferences on things, that they have the information, they need to make a decision, and that they would make a decision that clearly tries to maximize their wealth but that's not the way it goes. Right? We are human, we are emotional beings. Think the emotional intelligence we have to have with our decision making, sometimes we have our own perspectives and experiences and sadly, in this industry, people have probably preyed on that. They frame certain things a certain way to sell something, that's what sales is. I want you to think about it this way, listen to me talk about it this way and then you'll want to buy it. So the major difference now needs to be how do we help people recognize the behavioral side of things? And how do we, I think, get other advisors to really embrace that too, to make sure that we can help people through the emotional side of money and wealth, which again, the studies are called behavioral finance. So the major difference the point of behavioral finance is to recognize how people should act is different than how they actually act.
Adam Werner 03:42
We've certainly seen this and I know we've said it before. We can write the, I'll use quotations, like the perfect financial plan, right? You take all these steps, it's going to improve what you're doing, it's going to be great and ultimately, if action isn't taken, then the best advice is still meaningless in the end. So we acknowledge years and years and years ago that reality plays a big part in our financial planning process to help people actually implement change and that's not always easy. We know that for sure even on the personal side. Making changes, not just financially but personally, is not always easy to just flip that switch.
Benjamin Haas 04:36
So to me, it is about communication and that's where you take the book smarts of what needs to happen to then turning that into here's an individual that needs to not only be able to comprehend it. Again that's not the hard thing, either. We can be educators, are they comfortable with it? Are they motivated by it? And do they have or have they also had experiences that what we're suggesting isn't something that they want to move forward with because of some sort of other hurdle, whether it's an experience that they've had, a bias that they have, how they view the world, really can also dictate how they want to go about making these decisions. So that's why the discipline is so important that we have to get out of our own seat of going, here's what I know you should be doing and be able to communicate in a way that goes, let me help you through this process. Not to say you have to do things our way, not to be sold something but that you don't end up going down a path where you're going to regret the decision you made because you weren't seeing things, you weren't grabbing all the information, or you weren't comprehending other things that are going to help you get from A to B.
Adam Werner 05:48
Yeah, we've often had that conversation where we steer the direction of someone's financial life in whatever capacity to where we think it's going to be better for them but if there is that hurdle that they just can't get over for whatever reason, bias, previous experience, it's still on us to provide the context, give the perspective, in our experience and in our expertise, to at least identify the potential tradeoffs and sometimes it's okay if the end result is no action. But going through that work to get to that point is still valuable.
Benjamin Haas 06:34
Right. Have you considered this? How would you feel if this happened, if we go down this path, here are some dominoes that we recognize may happen. I'm going to get a little nerdy here. Our minds are trained, like 90% of our decisions are completely intuitive. They're completely reactive. They're very quick. They're not based on quickly going through some sort of reasoning and oftentimes for us, when our mind moves that quickly to here's what I want to do, it's a lot harder to then slow it down and say it's analytically working through the abstract, how do I need to then go through that? That's why it's our job to help people slow down and I think this happens a lot with investments, right? I'm seeing losses in the market so now I need to react to that. What do we do? What are we doing, Ben? What are we doing, Adam? And I think it's okay for us to communicate - it's okay, we got this. We've been through this before. We're paid professionals. We're experienced. That's not helping them though. It may be helping them not jump off the ledge but is it really helping them cognitively reason why they shouldn't be making these moves or why they need to stick to their plan, getting them focused back on, here's the main thing that matters to me and making them feel emotionally okay. We're not helping them do that by saying "we got it, just don't worry." They're going to worry.
Adam Werner 08:03
Yeah, and in my head, it's just the problem with being human right. It's eons of evolution and adaptation, for survival and now, here we are with a couple 100 years of this structure of our society, and money, finances, life, is now only a small window of time but our brains are still, for the most part, and that shocked me, 90% of our decision making is just like that, a snap of your fingers and it's done. So yeah, being able to take that pause, take that step back and evaluate a little bit deeper. It just shocked me that it was that overweighted to just that's the way that our brains interpret and make decisions in an instant.
Benjamin Haas 09:02
I think that's how that's why biases develop and I think that bias probably has a negative connotation as we talk about it conversationally. It will your bias, it has a negative connotation. It really is you've had experiences with things and that's now how your frame to believe that things will happen in the future. And there's not necessarily something wrong with that but like we see this a lot. I think we see it a lot right now with politics, confirmation bias. People seek out information that supports the argument that they want to make or the preconceived notion that they have and ignore other relevant information. So why are we so quick to make a decision on this? It's because we've been framed this is the way that we think and feel about certain things and we're just not recognizing other relevant data yet.
Adam Werner 09:51
So I'll throw this out. I don't remember exactly when it came out but I'm pretty sure it was JP Morgan that had they do a booklet every yearly quarter with a bunch of different, graphs and charts and the one that they had was specifically around politics and when there was a democratic presidency, Republicans were less apt to invest during those times and vice versa, when there was a Republican president, Democrats were less likely to invest. But at the end of the day, we've had this conversation before, we did two podcasts on the election, the markets are going to do what they are going to do, there's going to be some outside influence. There's so many variables that go into it but that shouldn't be the sole driving force behind huge decisions that are going to impact your financial life.
Benjamin Haas 10:41
Yeah, it's just one of those things that if people have this is my belief on the way that the world is, they're framed a certain way and decisions probably are going to fall within that tunnel, whether it's a good decision or not. Going back, traditional finance, you just told us history shows us that we should be making a decision that's going to maximize our wealth based on reason and all this fact and data. We know we work with people that can get in their own way and say, well, the elections coming, I just want to see what happens. Let's just see how things go. Here we are, the markets going to do what the market does so that's one example of a bias that may get somebody tied into a twisted knot that they shouldn't be in and we have to help them with that.
Adam Werner 11:29
And, just thinking for myself, no one likes to be told that they're thinking of something in the wrong way, so that's its own hurdle to get over. If you told me, hey, you're not thinking about x, y, and z, you're thinking of this the wrong way. That can hurt on a personal level. That Oh my God, I'm either going to push back at you. What's that called? Is that the confirmation bias? Where I'm just going to dig my heels in further on my side of things.
Benjamin Haas 12:01
Probably. So it's communication skills and certainly I'm not an expert in that but, it is to say, okay, but how would we feel if this happened? Are these still your goals? Are your actions aligning to what is leading you down the best path towards goals? So oftentimes, it's just trying to get to the root. It is not to deal with people who are encouraged and say, well, then we just can't work together. Sometimes our planning work that needs to be, we recognize that this is not something that's going to change in this person. So we need to build in other buffers to the plan acknowledging that they may exude behaviors or make decisions that could make things more difficult to get them to where they want to get to and build that in.
Adam Werner 12:57
That's a great point and where we hope we're different than some advisors out there that would be more rigid in their structure of advice that we do take that into account.
Benjamin Haas 13:12
Yeah, you mean the whole well, if you don't think like I think then you're fired. You're out of here. I think that the discipline is to help people recognize things and then if you can reframe certain conversations, it's to recognize that people innately are going to think a certain way based on those experiences. We all do it. It's how we stereotype too. The profession calls that representativeness but you and I wear glasses, so we must be nerdy. That's the way it goes. Basketball playoffs right now, you've got the interviewer, that sideline reporter standing next to this seven-foot guy and you go, well, that reporter must be really short. No, that guy's just really, really tall. Our minds are framed that way. It's representing one thing that we've experienced that we see and it's not framed in a way that is factual.
Adam Werner 14:09
Yeah, exactly.
Benjamin Haas 14:10
It happens all the time.
Adam Werner 14:11
Yeah, I'm laughing because I just had this conversation with Ava. We were watching the game, one of the Hawks in the Sixers and Trey Young who is six foot one on the Atlanta Hawks looks like the tiniest guy on the floor and he is by far, but he's still taller than I am.
Benjamin Haas 14:26
He's six one and there's a lot of these biases. We probably see it the most with investments, right?
Adam Werner 14:36
Sure.
Benjamin Haas 14:36
We see it. We just put out a podcast on the markets at all-time highs. Should I invest? You probably have this gut that it can't continue to go high so I want to bet on it going the other way or the fear of missing out, it's going up so I want to ride that up. These are biases that we create in our mind. We have seen can lead people down a bad path.
Adam Werner 15:00
And on that front, I feel like we've talked about it before, risk to us is, in some ways quantifiable when it comes to investments. It's not flip a coin, heads I win, tails I lose everything, it's a sliding scale. If you're willing to take risk with the stock market, you're going to have ups, you're going to have downs. Theoretically, the market has never gone to zero at least during our lifetime and hopefully it doesn't. But that's the mechanism behind the scenes, it's not a binary choice.
Benjamin Haas 15:39
This is a really good discipline within behavioral finance too. There's a big difference between risk quantifiable and uncertainty and oftentimes, we find our clients don't understand that difference. They hear us talking about risk as if there's a complete unknown on how things will go. When really investments are about risk. Uncertainty is more I'm getting in the car UPS driver has a liquid lunch, there is the uncertainty of an event in the future, we can try to insure against that. But it's that's very different from the risk of the stock market going up and down that is quantifiable.
Adam Werner 16:17
That's fair.
Benjamin Haas 16:18
So yeah, another key example of needing to help people understand where their fears are coming from and walk them through that. There's no better way to do that than just have a little bit of education around how we as humans think, emotionally and we've all gone through it.
Adam Werner 16:37
Well, I was going to say it's the difference between the risk and the uncertainty, I feel and I certainly am guilty of this but thinking from an investor standpoint and in thinking of risk is kind of an on off switch. We often think in worst case scenarios. So maybe that's more of the uncertainty side of things, to your point of the driving home today, the UPS driver has the liquid lunch. And we again, we steer towards the worst-case scenario, what is the worst possible thing that could happen? And then that's kind of the benchmark to either do something or not do something. When there are many gradients in between. You can hit your bumper and you got to scratch so that is a great example because I think we see this as planners a lot. You run into people that say, my neighbor retired and six weeks later passed away. I have to take Social Security right away because you know, this happened to him. I don't want it to happen to me, that could be one person prematurely, God forbid, passed away. You're now taking one example and because that was your experience, changing the way that you should not be making a major financial decision based on that one example. So yeah, we do it all the time when it comes to uncertainty, risk, and life experiences. We think to the extremes, which if the standard deviation curve, like 95% of the time is all the way in here, not including those extremes. Yeah, they're outliers for a reason so we have to recognize that and then be able to talk to people about that. Yeah, fair.
Benjamin Haas 18:17
So I could go on all day. I do get pretty passionate about this topic because I think it is really important to recognize that, yes, life is not a straight line, people lose jobs, people pass away, relationships change. Financial planning is a field where we recognize that life is going to go through twists and turns and plans need to be able to adapt to that. But going back to your point, adapting the plan and being able to communicate in a way that says, here's what we can do to help you. Here's the information we think you need and here's the frame of mind that's going to be most helpful to you in digesting this. It's becoming the more important part of the job, I think.
Adam Werner 19:03
Yeah, and we've talked about this I believe another podcast too, having a plan. Check that box number one, to your point of it's much easier to adapt an existing plan than just create a brand new one and a time of either emotional stress, financial stress, whatever the case may be, right, it's much easier to make an adjustment than it is to make a whole brand-new decision. So that is key number one, if you don't have a plan, obviously, we're strong proponents that you should and that will hopefully allow in times of stress, in times where emotions are running high, to be able to revert back to something that you did and hopefully a less stressful time with clear and clean emotions be able to have that to rely on.
Benjamin Haas 19:53
Yeah, because this is going to sound crude but to a certain extent just like the way of the world right now, robots are going to be able to do our job, the actual drafting of the plan. Here's a portfolio here, right math, traditional finance, we have all known information and here's what we should do to maximize wealth. What is our job? It's the human element side of that. You've got the plan but now we've got to be able to communicate it. We've got to be able to work through it. We've got to be able to stick to it in times of stress.
Adam Werner 20:27
That's right and I hope I have way more emotional intelligence than a Roomba.
Benjamin Haas 20:32
Rosie. Inside joke. Okay. Thank you for this. I think it is a great topic. It's not to say that we're experts in this field, we certainly are not but we're trying to get way better at being able to communicate on the emotional behavioral finance side of things. We think it's a discipline that's really important so to all our fellow advisor listeners out there.
Adam Werner 20:58
Yep, this won't be the last time you hear of it. here.
Benjamin Haas 21:03
All right. My energy level did match yours at the beginning there.
Adam Werner 21:08
I think you exceeded it. Great job.
Benjamin Haas 21:12
The truth is easy. All right. Thank you, sir.
Adam Werner 21:14
Thank you, take care now.
Benjamin Haas 21:26
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in this show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant, and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!
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