The Tale of Two Financial Minds

Posted on May 31, 2015 in News

As financial counselors, we are constantly trying to effectively and efficiently assist our clients in making prudent decisions with regard to their wealth. However, if you have been in practice for any period of time, it is likely that you have come to realize the very people we are trying to help often derail this laudable goal. In recent years, financial professionals have begun experimenting with the psychology of decision making to steer clients toward better behaviors. This advance toward adopting and implementing a behavioral finance approach to client counseling has come about due to the realization that clients are really ruled by two competing minds: the intuitive mind and the reflective mind. Unfortunately, without proper guidance, the intuitive mind all too often wins out to the financial detriment of our clients.

Buy low and sell high. A reflective mind sees the wisdom in these words. However, as we entered March 2009, how many investors held firm to this rational mantra? The intuitive mind is susceptible to more than just fear and greed. People often take solace in blending in with the crowd.  The herd mentality, however, can often push an investor into buying high and selling low as the new hot idea is bantered around at cocktail parties or viewed on CNBC.

Overconfidence is just as problematic as the herd instinct. It can seduce an investor into believing he or she can consistently outperform the markets by trading stocks at an irrationally high rate. The reality is, however, that no one has a crystal ball. Another nugget of truth is that Goldman Sachs is faster than the average investor. Its speed and those of other large institutional investors have been dramatically boosted by advances in computerized high-frequency trading and the proximity of their servers to those of the markets on which they trade. Day trading may be exciting for an individual investor, but the long history of investing shows that few investors truly understand that hindsight is not foresight and that investment success stories are as misleading as lottery success stories.

How can we, as purveyors of financial guidance, help steer our clients past the noise of everyday distractions? One method is to employ The Ulysses Strategy. This strategy engages the reflective mind in the present to bind an investor to a particular course of action in the future. It is modeled after the strategy that Ulysses used in his journey home from the Trojan Wars. In that journey, his ships were to pass dangerously close to the Sirenusian Islands, famous as the abode of the Sirens whose songs seductively enticed passers-by to leap into the water to their demise. Ulysses was determined to be the first to hear the Sirens’ songs and live. He instructed his men to fill their ears with beeswax, tie him securely to the ship’s mast and ignore any pleas he may make for his release until they were safely beyond the islands.

The Ulysses Strategy

Step 1 – The financial professional educates a client about the psychology of decision-making and how emotions and outside influences have the potential to knock a well-healed person off their feet. It is important that clients come to learn that the misguided impulses of the intuitive mind are natural, but the path guided by the reflective mind is the more prudent one to follow.

​Step 2 – The financial professional and the client agree on a strategy regarding the client’s wealth. Whether it is an investment strategy, a risk management strategy, a tax minimization strategy or some combination of wealth management strategies, developing a plan of action in advance when things are calm can help ensure it can be adhered to when the financial networks start singing a Siren’s song.

​Step 3 – The financial professional and the client formalize the mutually decided strategy in a commitment memorandum. While not legally binding, the practice of writing down the agreement and affixing one’s signature may help investors resist the Sirens’ songs they are bound to encounter in their journey toward financial success.

View article in New Jersey CPA – September / October 2014 issue »

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