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  • Home>Practice Management>Behavior Gap>Song Remains the Same

    Song Remains the Same

    Investors still grapple with the emotional side of money.

    Carl Richards, 06/08/2017

    In the past decade, it feels like we’ve experienced a lifetime of investing. We’ve hit the highs, we’ve slogged through the lows, and we’ve debated what, if anything, we learned. Plus, the knowledge around investing has exploded. It’s like we’ve been living in a lab dedicated to learning about investor behavior. Why do we really do the things we do when it comes to money?

    Here are five things I’ve noticed during my time in the lab.

    1 Human behavior is still human.
    The traits that helped us survive as a species— choosing things that bring us security or pleasure and running from things that cause us pain— make us horrible investors. Our brains struggle to adapt to a world where delaying gratification and dealing with pain are part of the package. We want to feel good now, so we buy high. We want to stop hurting today, so we sell low. I know all of this won’t be news to you. But it’s fascinating to me how little we’ve changed since the tulip bulb market crash burned Dutch traders in the 1600s.

    2 Money = feelings.
    Money is emotional. We’re not talking about spreadsheets and calculators. Money is about people’s fears and dreams, their goals and values. So, are we really surprised that things tend to go off the rails when we focus on the spreadsheet, but don’t speak to the things that matter most to people? We like to think we’re rational when it comes to money. But it’s the rare investor who only sees money as dollars and cents.

    3 Finance isn’t physics.
    During the past few years, we’ve seen an explosion of evidence-based investing advice. Of course, it’s far better than making financial decisions based on friends and stories. But it comes with its own risk: a false sense of precision. We need to remember that finance isn’t hard science. Irrational people won’t start floating away if they stop believing in the law of gravity. But irrational people can lose everything if they assume evidence-based financial advice is infallible.

    4 The industry is hacking at the branches.
    The personal finance industry tends to struggle most with this issue. What budgeting software should you use? What investment formula should you adopt? What technical tool should you recommend? Let’s be clear: A tool doesn’t help anyone if we haven’t helped people figure out what matters most to them. We need to spend more time talking about values and less time talking about the tools. Until we get good at helping people diagnose why they’re doing what they’re doing, we’ll struggle to solve the big issues in our industry.

    5 The signal is buried in the noise.
    Investors live in an information circus. Every theory, every tool, every guru has their own center ring of noise. To be clear, there’s a ton of valuable information about how to invest, budget, and even make more money. But investors are not necessarily better off because the volume can overwhelm even the savviest of individuals. We need to help people hit the mute button.

    The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.