Financial Planning Insights
5 minute read time
Recently, a very thoughtful colleague turned me onto a podcast called “A Slight Change of Plans.” The podcast purports to focus on how people deal with changing circumstances. But after listening to two powerful episodes, including one on the impossible cave rescue of a Thai soccer team, my take is the DNA of the podcast is really about courage.
Courage is an interesting concept. Several mentors and successful clients have isolated courage as a key success factor. Specifically, courage in decision-making separates success from failure, and having more courage makes people more successful. However, courage isn’t what it’s assumed to be.
In studying courage—from Navy SEALs to teachers in school shootings to business leaders—one thing seems crystal clear: the way courage had been historically described was dead wrong. Courage had classically been defined as the antonym of fear. But the antonym of fear is not courage, it is delusion.
Courage, on the other hand, involves the acceptance of fear. It means understanding and acceptance of potentially devastating consequences, and then choosing to do the right thing anyway.
Thinking anew about fear and courage got me thinking about financial decisions and market uncertainty. Statistically, there is a material, even tragic gap between market performance and investor results. Stated another way, had investors just ridden market performance, their wealth would be materially greater than it actually is. But obviously, that is not what investors did. They either bought at inopportune times, sold at inopportune times or both.
This difference between market performance and human results is often referred to as the behavior gap. In other words, investors’ comparatively lesser results are due to their “bad behavior.” In fact, a recent study by Russell Investments estimates this economic gap to have an annual value of nearly 2.5%.
There has been great progress in helping investors on appropriate investment behaviors. Not that long ago, advice to investors focused on arrogance and shame. Representative messages from the financial services industry were:
Putting all that advice together, what most people felt from the advisory industry was shame. And here is the thing about shame: shame leads to isolation. People generally don’t want to spend time with advisors who make them feel bad. So the advice repels rather than helps vulnerable clients.
There has been positive progress in the advice given to clients from the study of behavioral economics. Nobel winning scientists such as Daniel Kahneman, Amos Tversky and Richard Thaler began studying why humans make illogical decisions. While there are reams of books and papers on this subject, their findings really come down to one core insight: fear is the most powerful human emotion and, because of that, people give into it.
These authors have a lot of labels to this concept: loss aversion, risk aversion, anchoring, endowment effect—but at the end of the day, investors hurt themselves financially because they are scared.
What is interesting is where the “behavioral coaching” industry currently stands on solutions to these behavioral problems. The financial services industry still delivers shame-based messages. Don’t make emotional decisions. Don’t let your emotions get the best of you. The problem is that when it comes to changing behavior in a positive way, those messages are not only outdated but neurologically bereft. It is impossible to ignore fear. Our brains do not let us.
A better—but still not ideal—approach is focus on understanding the fear. The theory is that when clients recognize loss aversion and regret aversion, they will avoid giving into them. While this makes more sense than shaming or avoidance, given that human beings consistently engage in self-deceit and avoidance, it’s a “solution” that will fail more than succeed.
Another approach advocated by the financial services industry is called “nudging.” Nudging automates financial decision-making systems. The idea is to avoid giving clients discretion when emotions kick in. Nudging has proven to be relatively effective, but it still does not prevent someone from following the investing herd and buying high and selling low.
What is interesting is I could find nothing in the industry wisdom that leans into or advocates for the best-known human antidote to fear: courage. What investors need to recognize is that sticking to their investment plan in times of market volatility is an admirable act of courage.
Let’s face it, in time of market volatility, investors are experiencing the unadulterated fear of losing the impact, and potential happiness, of their wealth. That fear is exacerbated by the way the brain is processing financial information; loss aversion and regret aversion have kicked in. At this exact time, investors need to process, understand and recognize the fear.
But that recognition is not enough. The investor must also remember his or her values and goals. The investor needs to take a step back and visualize his or her future self. And then the investor needs to courageously protect those values, goals and his or her future self by sticking to the behaviors that make the plan work rather than taking the easier path of giving into fear.
Why is this final step of drawing out courage important? First, humans aspire to be courageous. Courage is more powerful than logical, rational or other “requests” the financial services industry makes of their clients. Second, a courage-based coaching strategy empathizes and validates the fear the investor is feeling; people should not feel silly or ashamed for wanting to act. Third, people want to emulate others they admire. There are worthy courageous people that investors will want to mimic.
In conclusion, financial fear is real. Understanding it was the first necessary step. Now we need to face it down, courageously.
Johnson Financial Group is a financial services company and marketing name for its subsidiaries Johnson Wealth, Johnson Bank, and Johnson Insurance. Johnson Financial Group and its advisors do not provide legal or tax advice.