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  • Home>Practice Management>Practice Builder>The Pride of Ownership in Financial Decision-Making

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    The Pride of Ownership in Financial Decision-Making

    You may not realize it, but many of your clients have preconceived ideas of what the best financial plan might look like.

    Justin A. Reckers and Robert A. Simon, 12/15/2011

    Over the next couple of months, we will talk in detail about a general concept we refer to as the Pride of Ownership. There are many ways our clients develop the Pride of Ownership and many ways that the biased thought processes it creates can derail economically rational decision-making. We will talk about irrational financial decision-making thanks to the Endowment Effect, Not Invented Here Bias, and what Dan Ariely calls the Ikea Effect.

    Selling the Experience
    From baked goods to BMWs, marketing experts have long understood the power of ownership. Humans feel a sense of pride when they have created something. Whether we create ideas or customized luxury vehicles, we tend to overvalue, from an economic perspective, things we have had some hand in creating.

    Betty Crocker takes much of the difficult preparation out of making brownies but knows its customers well enough to understand the company should not be doing all the work. It wants to make sure the cook puts in some work to develop the Pride of Ownership based on the effort they exert. Most people will not have the time or skills to make perfectly moist fudge brownies from scratch, so they are willing to have a little help. The delicate part is determining just how much work people need to put in to create the Pride of Ownership without requiring so much work that they simply choose to forgo the brownies and grab the Chips Ahoy.

    Similarly, luxury automakers allow us to pick the exterior color and trim, the performance features, and interior luxury accoutrements like misappropriated wood and bright red leather seats--all because they are selling the ownership experience, not the hunk of metal itself. There would be no reason to offer more than one version of a car if we cared only about the usefulness of it, so marketing experts aim more toward the experience factor and rarely talk about usefulness factors.

    Try this tag line--Chrysler: We'll get you from point A to point B. It certainly doesn't make us want to buy. But when the marketers sell an experience, suddenly customers can imagine themselves pulling into the driveway of their brother-in-law's house in a new luxury vehicle equipped with heated, reclining, lumbar-supporting, comfort-memorizing, bright red leather bucket seats. Who wouldn't be proud of having seats that need seven or more adjectives to describe them?

    Again, the Pride of Ownership kicks in. If the marketing experts were not able to make consumers feel the Pride of Ownership before buying, they may have problems convincing them to buy in the first place. This is why they sell the experience, not the product. Homo economicus would make choices based only on functionality and not care about the experience. But humans care more about the Pride of Ownership they gain as part of the overall experience.

    Scientists, researchers, and counselors even have a cute way of alluding to the Pride of Ownership. They say theories are like tooth brushes; everyone has one and no one wants to use someone else's. Apparently it is a common problem in their world if they have their own cliché.

    Pride of Ownership in Finance
    We all, including our clients in case you did not know, have thoughts and ideas about how best to manage money and make financial decisions. For example, we had a client tell us that the only possible way he could pay off a home equity line of credit is by using the proceeds from a life insurance policy he still owned on his former spouse. Our idea to use the large sums of cash he held in bank accounts, which were losing money after inflation, was instantly refused. There are many other reasons behind this extreme example, but the reason the client was able to immediately refuse our idea was because he had convinced himself that his idea was best, and the Pride of Ownership in that idea made it very difficult to convince him otherwise.

    Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

    Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

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