Sunday, January 23, 2011

Misusing, Behavioral Finance

19 January 2011 by Chip Workman, CFP ?

Behavioral finance has been around for a long time, but it seems to be gaining a lot of steam in the popular press, which tells me more and more people are interested in knowing the brain often cantankerous relationship with money. The results of this trend are both encouraging and alarming.

To its best behavioral, can teach us to stop focusing on hunting returns and use energy to understand why we are wired to make poor financial decisions, how to manage our reactions to events of emotional investment and create less stressed, more successful investors who understand their financial goals and how to reach them.

I am a firm believer in dealing with what we can control. We cannot control the market, but we can control how we react to their ups and downs, as our investments and the related costs and advice how to spend and save. Since this change of focus is a step in the right direction and I hope this trend continues.

So, what is worrying me? Well, the financial services machine is starting to pay attention to this phenomenon. Without names, major wirehouses and other institutions are adding behavioral finance experts to help you understand what this means for their business model. The first results of these efforts are what is relative. In a video posted recently, one of these new team explained how they were using what they know about the behavior of building products to suit various styles of personality and calm the fears of potential client more. The goal seems to be focused exclusively on putting the customer in a product that facilitates their current concerns, not find something that is actually appropriate for your needs. It might appease them now, but it will probably cost them dearly in the long term.

This seems to be the continuation of an upward trend in society to find always the solution more immediately rewarding, ignoring the real problems. Here in my hometown, we recently watched our city leaders mull over a new budget, struggling for weeks with painful cuts in the various departments and find a clear answer for a majority. Their response? Passing a budget "balanced" and any cuts taking from reserve funds and borrow the rest. Incredibly pleasing to the senses, terribly damaging in the long run. The same can be seen across the nation to the detriment of our futures, our diets, our education and our overall value systems.

Many individuals and families have spent recent years live experience of how this may affect your personal finances. Allows greater interest in behavioral finance to disseminate the progress we made in the understanding of how we treat financial decisions. Use it for anything other than create better educated and more disciplined investors is a misuse of these tools and improves only these harmful effects.

The goal of good financial planning and advice not only to put the customer at ease on any title or the recent crisis has most interested them. The goal is to understand their relationship with money, their ability to tolerate risk and try to explain what amount of risk require to achieve their goals. While a frank and honest look at where booths can be stressful and frightening, having a path that will lead you to a realistic expectation of success is the de-stressor.

We must, of course, continue to explore the science of behavioral finance.  It is critical that we all understand the importance of their self-imposed roadblocks to improve our financial health. But, to answer those results with a fix is the wrong approach. As with all matters relating to health, ignore the miraculous for tried and true methods of a long and healthy life.

Chip Workman, CFP ?, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, Ohio

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