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Confessions of a dangerous mind
By getting into the minds of clients, advisers are better placed to gauge the true attitude to risk and reward of their clients, but it is not just consumers whom behavioural finance speaks to, but money managers and fiancial advisers too.
Mr Cheseldine advocates investors and their professional advisers to be aware of their own biases, and if possible filter them out; use frameworks and models that challenge statements and assumptions; consider the unpopular; and focus on evidence.
A report published by the Resolution Foundation last year, Influencing Financial Behaviour and the Role of Generic Financial Advise, said that for generic advice to work, it should be given "in light of the lessons learnt from the field of behavioural economics" to ensure it works "with the grain" of people's real-life tendencies.
It addressed the issue of advisers inadvertently framing questions and unconsciously influencing client information and decisions. It suggested six dos and don'ts:
• Do ask the most salient question first
• Do not ask two questions at once
• Do not ask questions which contain assumptions or those with hidden contingencies
• Do not ask hypothetical questions
• Do not use ambiguous terms which mean different things to different people
• Do use a mixture of positive and negatively-worded questions and open-ended questions to avoid leading questions
Claudia Wood, research and policy manager for the Resolution Foundation and author of the report, also suggested emphasising the losses associated with the status quo rather than longer-term benefits of an action to combat regret theory and prospect theory, and suggest short-term achievements with immediate benefits rather than a long-term goal. For example, the tax benefits of pension saving can be illustrated by how many extra hours a client would need to work to achieve the same financial result.
When considering which investment manager to invest with, the London Business School's Mr Weber said consistency is key, looking for those that avoid excessive risk or conservatism. He added: "Knowing the pitfalls that lead to financial excess helps. Having goals and working to a financial plan is the best way to prevent emotional swings from reducing your financial well-being. Speaking to advisers about investment plans should help."
Anna Lawlor is a former senior features writer for Financial Adviser and is currently deputy features editor for Investment Adviser
