Ep #153 - The Behavioral Biases That Cost Clients the Most

Most long-term financial outcomes aren’t determined by picking the right investments. They’re determined by how people behave under stress, uncertainty, and emotion. Listen in as Adam and Ben discuss the very human and common biases that, when left unchecked, can derail plans. They’ll share how they view their roles as planners how they try to help with stress, uncertainty and emotion. 

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[00:00:00] Ben Haas: Hi everyone, and welcome to AB 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.

[00:00:27] Ben Haas: So for today, the big idea of the episode here. So much goes into planning, but I think what we wanna focus on today is the fact that in our experience, this whole idea of long-term financial outcomes and projections, they're not really determined by picking the right investments all the time.

They're usually determined by how people actually behave throughout the process, under stress, through uncertainty and emotion. So, Adam, help me kind of to the listening audience today. Let's just be really raw about the fact that we're human. We have emotions, there are biases that we need to recognize, and then, you know, what's our role to try to help people through that?

[00:01:07] Adam Werner: Yeah, I'm glad, I'm glad you framed it that way because yes, I think this is, this is gonna be a tougher episode because it is very much introspective on our emotional kind of competence.

[00:01:19] Ben Haas: Yeah.

[00:01:19] Adam Werner: When deal dealing with finances and investments. So yeah, I guess just right off the top in our, 15 to 20 years ish, you know, of doing this work.

It's closer to 20 than it is to 15 now, which is,

[00:01:32] Ben Haas: it's 20 for me this year. Yeah.

[00:01:34] Adam Werner: Crazy to think about. But we've, it's been very rare, if at all, that we've seen somebody's financial plan fail because the math was wrong. It's almost always because humans are human. We make decisions that are emotional and that's typically done at the wrong inflection points.

You know, in time.

[00:02:01] Ben Haas: It's that old saying that if all the people needed was kind of knowledge and information to accomplish their goals, then we wouldn't have a job to do. Right? Right. Nobody would need financial advisors. There's just this difference between knowing what to do and actually being able to do it especially when things just feel heavy or awkward or their stress, fear, greed. Too much information, you know, all the different things that we can talk about. So, let's maybe just go through it and talk about this in the sense of the big risks to your long-term plan, actually might be you and how you think and feel about things. So let's just recognize what those things are, and talk about it.

[00:02:41] Adam Werner: Yeah. It's is the problem in the room with us? Yeah, it's me, it's us. It's the human side. Yeah. That, that first one I think that comes to, for most people it's just that aversion to loss, that aversion to risk. Right? I just, I can't stomach, I can't handle emotionally, psychologically, you name it.

Right? This idea of. These are my hard earned dollars. I'm putting them aside, I'm doing the right things, and now I see it go down. And that is just such a visceral kind of feeling and event to kind of go through. And I quickly think back to, I think it's only been twice in our experience where we've had clients not able to make it through some volatile periods.

And those just have always stuck with me and probably always will. Just that, that inability to get through what we know historically is always a temporary, kind of blip in the graph, but we gotta be able to make it through you know, for people to be able to hopefully achieve their long-term goals or at least put themselves in a better spot.

So just that number one is just not being able to tolerate the investments that you're in, which that, there's many different ways that, that could, we could get to that point, which I know we've addressed in other podcasts, but I'll just, maybe I'll just stop it there. It really is just that idea of, the you know this stat better than I do. Yeah. Okay. The fact that losses are more visceral or, you know, our reaction to them is so much greater than the gains and the happiness from seeing things grow.

[00:04:14] Ben Haas: Yeah. And that's kind of the point of the podcast, right? It's very human. It's 2.5 times more pain of loss is just so much more. So yeah, recognize that anytime we're going through that volatility, it is a moment in time. Right? And I know that we'll have conversations maybe with some of these other biases around, you know, how the market has performed. And it's really not our job at that time to just preach history and say, well, history has always said it is to recognize the emotions. But you know, there certainly are planning things we need to do to keep people between themselves and making those big decisions. So

[00:04:51] Adam Werner: yeah,

[00:04:51] Ben Haas: I think one of the other biases that we see is just like a recency bias.

Mm-hmm. And that can go both ways, right? It can be, I want to hang on to something that's really worked very recently. It can be, you know, believing that this time is just going to be different than before. Mm-hmm. I think sometimes the putting it in perspective, how far you've come, is part of the job there.

You know, we've used this example before. If you bought something for a hundred bucks and it went to 200 bucks, you've now like maybe, because it's there. Anything that's going on around that price right now feels like, well, I'm losing. 'cause now it's down at like 1 75, you know? Right. You've kind of anchored, maybe I'm jumping to another one, you've kind of anchored on that high watermark instead of seeing how far you've come.

So it's when in doubt, zoom out. You know, it's our job to make sure that we kind of help people see big picture or look for big picture. But your job in the planning process is also to try to do the same for yourself. Don't let current events where we are right today, kind of skew what's happened before or where you see yourself going.

[00:06:02] Adam Werner: Yeah I think that's a, those, well, I'll say those are two great ones that you kind of put out there. And another one there that I think it does kind of fit in with the whole thought of the recency bias and just, you know, this time is going to be different, just the general overconfidence that can sometimes come with, well, if this is what has happened.

This is my outlook kind of on where things are going. I'm gonna put more of my eggs in one basket because I feel so confident about this idea, whatever that may be, or whatever the stimulus to that may be. You know, whether that's just market timing, right? I'm gonna, I'm gonna be able to get out of the way when before things get bad and I'm gonna be able to get back in, you know, at some point before things are way higher than when I got out, which we know anecdotally is typically not how it happens.

But yeah, just that idea of o overconfidence that I, I am so sure that X is going to work, that I'm just going to put my blinders on and kind of run with it, and that can work. But just like anything when it comes to investing, it is anyone's best guess on kind of where things are going. I think we've been very humbled in our experience to know that even as strongly as we feel of where we think things are headed. We don't know, the world doesn't know. These massive institutions don't know. We're making educated guesses, and that's where, from our standpoint, as you know, investment managers, we like to believe in diversification and take a more neutral approach that we know that we don't know everything, so let's plan accordingly.

[00:07:44] Ben Haas: Yeah. The flip side of that being, you know, not under confidence, but just this, I'll say kind of fear of uncertainty or, you know, how I view things in life. I'm not able to get those blinders off, you know, and I'm, point very quickly to just, I think, how people feel about politics and economics, just because I think we have felt that as advisors a lot more frequently even going back to as recent as April, you know, when tariffs are announced.

If we didn't know where our clients stood politically before that period of time we found out pretty quickly in a week or two. You know? As sim as simple as picking up the phone to talk to somebody and you can hear the news network. right? Blaring through the phone. Mm-hmm. People just locked into it.

And then how they thought and felt about that. Pro or con right? Yeah. People all over the place of, all over the spectrum. Mm-hmm. Mm-hmm. You know, it, it did inform how they were asking us to kind of respond to things like their life savings. Like, shouldn't I get outta the way of, out of this? Isn't this going to ruin my, you know, retirement?

Yeah. We kind of just, we come to all of these money things with our own life experiences and perspectives, and usually what we value and how we think and feel is going to create. A funnel for that. But we need to recognize that can be dangerous, right? How you think and feel about politics may not be aligned with how the market has just simply moved higher over time, regardless of whether you like the environment or not.

[00:09:14] Adam Werner: Well, yeah, and I think what was, I don't know if it was comforting or just interesting, just. You said it right, the April tariffs and just new administration kind of coming into play last year. Just how flip flopped some conversations ended up being if their quote unquote, you know, political party was the one pushing these things out there.

The ability for people to be resilient was higher because they believed and agreed. With what was happening. Right?

[00:09:44] Ben Haas: Yeah, that's a great point.

[00:09:46] Adam Werner: Vice and vice versa. So JP Morgan has a, had a study, this is years and years ago, where they would just kind of map when different political parties were in, in control, whether that was, you know, congress or the presidency.

And for investors being on the opposite, you know, political party, just how they viewed. Investments or how they viewed, you know, the outlook for the markets. And it was almost always inverse, right? If Republican was in control and I'm leaning Democrat, then I don't feel good and vice versa. And, but what we've seen just over time is the market cares to a degree, but it is just merely one variable out of thousands of different variables that are going to move the markets.

So there again, just being able to filter the noise. And may and try to remove, and this is where it all, I think it all comes down to just try to remove as much of the emotion from the decision making when it comes to the investments and financial planning side of things. Just puts you in a, we believe in a much better spot to weather all of the changing variables of life.

[00:10:51] Ben Haas: Yeah. Very well said. , We'll call it herd behavior. And you know, there was, I think a little bit more of this for us with the news headlines a couple years ago when there was, you know, me, the meme stocks crypto probably falls under that. You know, AI right now, we've just seen so much investment in tech.

But it's that feeling that, well, everybody else is doing it. And I'm hearing these stories of people like, making lots of money real quickly that I'm going to do that. Right? And that can go both ways. The old story is that, well, if you know, are in the movie theater and you hear the fire alarm go off, oh, and everyone is like, sprinting toward the doors, you know, are you just gonna follow that herd or do you pause for a second?

Do I smell smoke? Do I, you know, do I hear anything? You know, we just, we're kind of naturally drawn to just follow the group and especially in financial planning and investing like, but that, but what the group's doing are not the major inputs into your financial plan and your tolerance for things and what you're looking to accomplish.

So, it's an interesting one for sure.

[00:11:57] Adam Werner: I'm fascinated by that because just, and I don't know that I've necessarily had this thought before, but yeah. That is just so deeply ingrained, like human behavior. You think back to cavemen, right?

[00:12:11] Ben Haas: Okay.

[00:12:11] Adam Werner: It was literally, you probably had to follow the herd because that was survival.

That was your way to ensure that you were going to make it to the next day. So though and I don't even know if that's truly where that kind of stems from for us, you know, psychologically in today's day and age. But I feel like that is often, like, there, there are things that are just so deeply ingrained in us as humans, as we've kind of talked about, that we can't necessarily avoid it.

But the goal is to maybe try to manage it. Just be aware that this is a thing and try to manage it as best you can.

[00:12:48] Ben Haas: I think we see it in, in some of this conversation today. Most of it has been focused on investments, but you know, there's other parts of our financial life.

You know, I'm just thinking, we used to call it the water cooler talk. Like you're having a conversation with a coworker and she's talking about social security election and what she did, and now you've got a client coming to us going, well, this is what she did and it worked for her. So why wouldn't I do that?

Well, let's go through what, you know, goes into this decision for you and your unique circumstances and finances and your relationships and, you know, now we're getting out of herd behavior and back to what your plan is.

[00:13:24] Adam Werner: Yeah. Yeah. And I don't know if I was gonna say, maybe this is kind of the flip side of that, but my, maybe not necessarily.

Just that idea of, you know, the status quo bias that just the uncomfortableness that comes with doing something different, right? There's, yeah, there's the comfort in staying where I'm at. It's the devil I know is oftentimes better than the devil I don't know. So I'm fine to just, I know I should maybe be making these changes, but it's uncomfortable and I'm uncertain.

So the safe thing is just to sit still and not do anything. Which oftentimes for investments can be the right thing if you're allocated appropriately for your plan. But yeah that's often one that, that we see in a lot of people, just the inactivity which again, can be a good thing, but oftentimes we see it as a downside more so on maybe some other planning aspects.

Well, now we've probably said this 20 times on the podcast, but just the effect that estate planning documentation is one of the very last things that people do is because it is an uncomfortable thing. And if I don't do anything and I don't think about it, I can set it in a box. I'm fine, I can go on about my day.

But it is a risk.

[00:14:38] Ben Haas: Yeah. And I, so I'm gonna parallel that into maybe how we should wrap up the podcast and just talking about our role. You know? Mm-hmm. Status quo is a thing. People come to a planner because they need advice, but then the back end of that is you gotta implement it. You gotta take the steps to actually get these things done.

And we've certainly made that a focus of ours to help beat the stat that is 70% of our clients only. Put into action, 20% of our advice like that is failing, you know, so. Mm-hmm. But we need to recognize the human aspect of what goes into that. Some of these decisions are hard. Some of the, those next steps maybe aren't known.

There's a lot of financial jargon out there, like we're part of the problem. But it really is our job to kind of recognize that human side of you, help you implement things. And I'll say just help create then a framework for you to be able to kind of make decisions and implement these things.

[00:15:33] Adam Werner: Yeah. And that's o oftentimes our role in the process isn't necessarily just, you know, telling someone exactly what to do and assuming they're going to do it. But just being the sounding board, right. Just having those conversations. Yeah. And what we've seen lately is a lot of the conversations that we've had over the last couple of years when it comes to, you know, market volatility and just not feeling good about where things are headed you know, ultimately comes back to, at the end of that meeting, even if we didn't necessarily take action on anything and we didn't there's, we didn't accomplish anything, quote unquote.

To be able to have a client say to us, I feel so much better after having this conversation. Like I'm just, I'm feeling better. I can set this aside. I've kind of scratched the itch and know that I'm going to be okay. Sometimes it's just that simple, right? Let's just have the conversation, speak it into existence.

And again, this is where having somebody you can lean on and trust Yeah. To guide you through that conversation is so key. Yeah. So again, just I think our role there is not always necessarily to just be the real blunt, here's exactly what you need to do, but sometimes it is just helping people avoid making decisions that we believe and have seen that we, that they may regret at some point down the line.

[00:16:58] Ben Haas: That's just it. Like success is sometimes doing nothing but to get to the decision that I'm not going to make a change does mean talking it out. Right? And us understanding where they're coming from, why they're feeling the way that they're feeling, right. There usually is a trigger there. And if it, if we don't know kind of what makes them tick, why money's important to them, then it's harder to get to that point.

So if we can go into those conversations going, yeah, but Mary Jane, like taking the grandkids to Disney this year is not affected by what's going on. You know, very specific example. Sure. Yeah. Yeah. And her name's not Mary Jane, edited for storytelling here. Part of that is just to make sure that they stay focused on the things that matter to them.

And to your point, we're not always here to be some sort of performance chaser. Right? We're here to be a thought partner. We're here to help guide you through things. And if that means we're just holding the hand sometimes, then yeah, that's part of the job. We're not gonna help eliminate emotion.

Mm-hmm. But let's meet you where you are, the human side of where you are, and trudge forward with the plan, knowing that over time, if we can stick to it, get out of our own way, we should be okay.

[00:18:11] Adam Werner: Yeah. Yeah. Yeah. I'll maybe I'll just double down on, on your last sentiment here that Yeah. Our goal is not to dismiss anybody's emotions when it comes to this, 'cause we are human too. Yeah. I will say we have these thoughts, but maybe that's where, you know, again, just our expertise and just our experience over the last 20 ish years have give, given us a different perspective than on the client side.

Maybe that's better, for better or for worse, right? We've become a little bit numb to be to, to that side of just, you know, seeing the market movements. But I think that then puts us into a much better spot to help people navigate those emotions, 'cause again, we don't wanna eliminate that, but we need to help build these plans with that in mind.

We know that it's so natural for anybody to be thinking and feeling negatively. Yeah, when things feel chaotic, which the world feels chaotic a lot of the times lately. So yeah, just having the conversation, let's just talk it out, figure out what's gonna work best for you, and let's make sure we actually implement whatever those changes may need to be to get to that point.

[00:19:20] Ben Haas: Well said, sir. As always, thank you for your guidance.

[00:19:24] Adam Werner: Thank you.

[00:19:25] Ben Haas: Till next time.

[00:19:27] Adam Werner: See you then.

[00:19:27] Ben Haas: Bye.

[00:19:34] Ben Haas: Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the 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.