Ten Ponder Points brought to life

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Over the last ten days, I have posted a series of short ponder points that relate to humans and the way we navigate the world around us. In this final article, I bring those ten points to life, in the context of financial planning.

We live in an always-on world with access to more information than ever before.

It’s tough for people to navigate the noisy landscape of modern life, and it’s a real effort for people to find their way to relevant, meaningful, and factual information; the information they may need to underpin important decisions.

Technology is often the amplifier of this noise, presenting us with cognitive conflict points that we also need to try and process. The main reason for these conflict points (where our brain evolution is trying to catch up with the world around it) is part of our evolutionary story. It’s a fact that the human brain and societies evolve together. However, the main issue is the difference in evolutionary speed. It’s a real tortoise and the hare situation, with the brain trying to ‘catch up’ to a society that is developing at warp speed.

Modern life also brings with it much more fake news! Fake news isn’t a new thing. As far back as 1672, King Charles II was issuing proclamations to “restrain the spreading of false news…”. The issue isn’t that fake news exists, it’s the speed at which it spreads. Research in the USA by MIT found that thanks to social media, fake news travels 12x faster and deeper than the truth. Often fake news is put out into the world to shock, surprise, and generally get us to engage with it. However, news and social media can expose us to strong emotional information and imagery. Our brains are wired to process this powerful, salient information not only quickly and automatically, but with less accuracy. It’s also worth remembering, that from a biology perspective, our hearts and our minds are always interacting. What’s important to know though, especially in relation to decision-making, is which is being the most dominant.

We also need to consider the role our unconscious behavioural biases play their part. When we are trying to make financial decisions, our brain in trying to make sense of all the information we are throwing at it. When we’re calm and the information is clear, things are relatively easy. When we’re stressed or anxious, and information isn’t that clear, things get a bit more complicated. Stress, anxiety, and worry see us processing information far worse than when we are in a state of calm. One of the main side effects of this is our inability to properly assess risk. This means that any decision involving taking a risk, such as a long-term investment, could end up being sub-optimal if this decision is made when stress, anxiety, or worry are present.

One of the ways we can counter this, to a degree, is through learning and experience. We may be feeling stressed or anxious about a financial decision, but we’ve may have made a similar decision before, and can call on that experience to help guide us through the present. Recalling a similar situation we’ve had before, that we can use as a kind of benchmark, also prevents us predicting how the decision we’re making may play out. For example, if you’ve lived through a stock market crash, you’ll know how you reacted and therefore don’t need to overly predict how you may behave if it happened again. In other words, whilst our brain biology plays its role in how we navigate the world, we learn primarily through experience and context. What we think and what we do are often two very different things.

But even when we call on experience to help guide our decisions, it doesn’t mean that events won’t unfold that cause us to revisit the decision we made. Financial Planners are seeing many clients showing real anxiety and even fear, at the recent market volatility, with some clients – even those who are experienced investors – becoming fearful of losing their life savings.  We all experience fear and anxiety at points in our life. We need to remember that these feelings are very powerful, and it is much easier to learn fear than to unlearn it.

 And it’s against this backdrop that Advisers have two core roles. The first is understanding that clients are first and foremost paradoxical human beings. Each and every client will navigate their world in their own unique way. Sometimes we really understand this and can get on the same page as the client. Sometimes we can even feel it, bringing empathy into the equation – one of the most powerful human abilities we have. But remember that empathy isn’t just about feeling. Empathy is split into two categories. Cognitive empathy is our ability to identify and understand another person’s feelings. Affective empathy is where we share another person’s emotions allowing us to feel what someone else is feeling.

The other role is that of a trusted adviser and co-pilot. Being the client’s co-pilot as they navigate life and made decisions that will impact their financial wellbeing is a crucial role we can all play. Helping clients stay grounded in reality. Demonstrating to clients that short-term emotional reactions and decisions, only acted on to give short term emotional comfort, can have a long-term impact. We will all make decisions in the here and now that would be strongly challenged by our future-self. So, it’s important that we work with clients so that they don’t live a life where they will look back with regret at decisions that only benefited them at some point in the distant past.

But this doesn’t mean we need to tell clients what to do, or worse still, tell them that their behaviour is bad or good! Using our own values as the benchmark, we are often quick to condemn the worst behaviours of others. But we must remember that behaviour is a product of our biology, and whilst that can create bad behaviours, it is also responsible for our best behaviours. If we remember this, it allows us to help clients to make better choices, but factoring in the financial plan, their values and beliefs, and the evidence needed to drive their financial decisions.

We all make decisions each and every day. Many small and insignificant. Some large and very significant. When we’re making important financial decisions that will impact our futures, there is a lot of factors we need to process in order to land on the right choice. It will mean that in some cases a client will need to choose A over B – which may very well be the correct decision for them. But we’d be naive to ignore the fact that no decision ever happens in isolation. When we make a decision, it has an impact on something else, which has a knock-on effect to something else. It’s the law of unintended consequences.

 Therefore, part of the overall role as a trusted adviser, is to make sure every decision is not only based on fact and evidence, and ‘noise’ in eliminated, but also that the client is fully aware of the potential consequences of their choices. It’s within this framework that we provide the best chance at making sound decisions that can lead to the outcomes the client desires.

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