Welcome to Financial Advisor IQ
Follow

Investors Should Put a Capital “I” in Behavioral Finance

January 6, 2015

Behavioral finance doesn’t go far enough to keep investors on the correct path, financial advisor Rick Kahler writes in the Rapid City Journal.

Kahler thinks behavioral finance can teach us why we do dumb things like buying high and selling low. But he says it does little to help us understand how our thoughts and attitudes about money can get us into deeper and more lasting trouble. For this kind of insight, Kahler recommends “looking into the past to revisit the events in our lives where our strongly held delusions were formed.”

In this way, an investor might come to understand why, for instance, she considers insurance a rip-off, the stock market a gambling den or inheritances innately corrupting. And, armed with a better sense of what makes her tick financially, the investor can make better decisions and learn to live more tranquilly with those choices. “We can take control of our money rather than our money controlling us,” writes Kahler. “Our guides can be financial advisors, financial planners and financial mentors.”

But advisors take note. The point of encouraging clients to explore deep-seated financial prejudices isn’t necessarily to overcome them. It may be enough to recognize and acknowledge them. So, instead of trying to cure a client of her discomfort with insurance, it may be more practical to say something like, “Look, we’re going to talk about insurance, which makes you crazy; but we’re going to tackle it anyway because it’s an important part of your risk-management profile. So here: Squeeze this rubber ball as we talk.”

By Thomas Coyle
  • To read the Rapid City Journal article cited in this story, click here.