Financial planning is complex, and many financial decisions involve a trade-off between the present and future. And according to behavioural psychology*, there are biases that can impact the way we view the future. So, how can you navigate your clients’ biases and help them look to ahead?
Behavioural biases are predictable errors that can unconsciously influence how we interpret information and make decisions. Our biases can be based on our emotions, experiences and background. And most of us will experience a form of bias when it comes to making important decisions.
Behavioural biases can impact our financial planning because they alter our perception of reality, which influences the decisions we make. Especially if we’re overly optimistic about the future or struggle to see past our present circumstances. And they could be causing barriers for clients and affecting the way they view their future. Here’s how.
Optimism bias goes deeper than us just choosing to look on the bright side of life. It’s a cognitive bias that makes us believe that things will always work out for the best. It gives us a rose-tinted view of the world, which can make it difficult for us to see where future pitfalls may be. This could lead to clients overestimating their success and failing to put protection in place for their future.
Present bias is the other side of the coin. Clients with present bias have the tendency to focus on the here and now, as well as over-valuing immediate rewards over long-term benefits. If clients have present bias, they might struggle to see past their present circumstances – good or bad.
Here are some questions to consider when identifying if your clients have a bias.
Optimism and present bias can create barriers to future thinking because if clients can’t see the risks ahead, they can’t plan for them. But bringing events to life could be the key to helping your clients put effective plans in place.
For example, a way to challenge your clients’ optimism bias, is to show them what they might lose. Loss aversion is the preference to avoid losses rather than to gain new things. Showing clients what they might lose, instead of gain, can make it more tangible for them.
Understanding your clients’ bias could help you to manage their expectations and set practical future-focused goals. So, they can still have a positive outlook while preparing for life’s unexpected turns.
*We’ve partnered with We are IB, leading experts in behavioural psychology, to understand how clients think and the barriers this might cause when it comes to thinking about the future.
What does psychology tell us about risk tolerance?
Are clients more likely to discuss their financial planning with their loved ones?
Why is goal setting so important when it comes to financial planning?
With HumanSense, CPD training for advisers in behavioural psychology.
