Behavioral Finance: Thinking vs. Feeling Clients

Leave a comment

Uncovering Client Tendencies: Thinking vs Feeling

Determining if a client is more aligned with the Thinking or Feeling preference gives advisors two huge pieces of information about how best to work with them.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on August 30th 2012

In our last couple of articles, we began drilling down on the four continua of personality and psychological preferences that underlie the Myers-Briggs Type indicator:

–Extraversion v. Introversion
–Sensing v. Intuition
–Thinking v. Feeling
–Judging v. Perceiving

An individual’s personality will give us vital guidance to the client’s psychological needs, behavioral patterns, and the way in which emotions interact with and interrupt financial decision-making. So far, we have covered the Extroversion vs. Introversion continua and the Sensing vs. Intuition continua. We offered observations of both sides of the continua and uncovered some common biases and barriers that advisors might encounter on the way to economically rational decision-making.

This month we take on the next leg of the Myers-Briggs Type indicator and discuss the Thinking vs. Feeling preference. As an advisor, this overview will help you 1) recognize which side of the ledger your clients occupy and 2) give some ideas and advice as to how you can best work with them and the specific behavioral and cognitive biases they may bring into their financial decision-making.

In previous articles, we presented a brief description of the Thinking individual juxtaposed with the Feeling counterpart and gave a ten thousand foot view of their communication styles and tendencies toward certain economically irrational thought processes. Determining if a client is more aligned with the Thinking or Feeling tendency gives advisors two huge pieces of information about how best to work with them. Stated very simplistically:

1) The Thinking preference is objective in decision-making, placing more weight on facts.

2) The Feeling counterpart is expected to be more subjective and place more weight on personal concerns.

Clients are mostly Thinking or Feeling but are likely to still have traits of the other. A Thinking person may make a decision based on his or her need for objectivity but test the decision for success and soundness with a Feeling style of decision-making. So it would not be accurate to pigeonhole individuals into one classification. Although we will discuss them as two separate categories for purposes of contrast, advisors must avoid the misconception that a Thinking person must be overly intelligent and a Feeling person must be overly emotional.

Thinking
Thinking individuals are likely to be more successful at critical thinking and integrating logic-based data into decision-making processes. They may consider an option and convince themselves it is “irrational,” “illogical,” or “doesn’t make sense.” Following are some brief descriptions of observations common in Thinking clients that can help an advisor recognize their personality preferences.

Observations of a Thinking Client

–Drawn to technical and scientific fields
–Task oriented
–Values fairness
–Decisions happen in the head, not the gut
–Grounded in logical explanations
–Avoids personal interaction in favor of objectivity
–Thinks in terms of pros versus cons

We believe Thinking individuals are inclined to exhibit active, cognitive biases thanks to their preference for logic and thirst for data. Following are some behavioral finance biases we believe should be expected in Thinking personalities:

Aversion to ambiguity. Thinking clients are logical and meticulous in their decision-making. The existence of ambiguity will lead them to seek additional information and avoid options for which missing information makes the probability seem unknown and a pro versus con analysis is not possible.

Empathy gap. A Thinking client’s avoidance of personal interaction in support of their objectivity may leave them prone to a tendency to underestimate the influence or strength of feelings in others. This is especially true in the world of negotiations. The Thinking client will see divorce, probate, and other disputes as logical business deals to be made and miss the emotional components necessary to navigate.

Focusing effect. Our Thinking clients are very prone to the focusing effect as they actively seek data to inform their decision. Their focus will be the data search, which could lead them to place too much importance on one aspect of the decision-making process and cause errors in judgment when they miss other external information, such as emotional issues and the opinions of others.

Feeling
Feeling individuals are likely to be the conflict-avoidant type. They may float around with the hope and confidence that things will be OK and allow that belief to affect their decision-making. They have this confidence because they avoid tough decisions and tough communications. They may genuinely believe restoring harmony to their world after a difficult decision is more important than the outcome and long-term ramifications of the decision itself, leading them to look past the information at hand and the cold hard truth of decision problems.

Observations of a Feeling Client

–Values the opinion of others
–Is able to judge decisions from the point of view of another person
–Justifies decisions based on what they perceive to be best for others
–Caring and warm
–Decisions happen in the gut or the heart, not the head
–Mushy
–May sugar-coat or entirely avoid saying things in the interest of being tactful
–Crowd pleaser

We believe Feeling clients may be more inclined to exhibit emotional or social biases. Following are some behavioral finance biases we believe to be common in Feeling personalities.

Bandwagon effect, herd behavior. One of the pervasive elements of the Feeling personality preference is the desire to maintain harmony. The Feeling individual will look to others and rely heavily on their opinions and points of view to develop their own perspective, making them prone to the bandwagon effect and herd behavior.

Conflict avoidance, loss aversion. Feeling clients prefer to process information and relay their thinking via tactful, conflict-avoidant communication. We believe this to be true thanks to their desire to avoid the social loss they think that conflict represents. For that reason we consider them likely to suffer from loss aversion in their financial decision-making as well.

Planning fallacy. Feeling clients may suffer from planning fallacy because they underestimate the time necessary to complete important tasks. They might show up unprepared for meetings, even meetings with strict agendas and various reminders.

Confirmation bias, ease of information bias. Because Feeling clients have an overwhelming concern for harmony, and a nervousness when it is missing, they can be led to seek out easily available information that confirms preconceived notions in order to restore the social harmony that was lost. This can lead to missing the cold, logical truth.

Next month we will have a more in-depth discussion and application of the Judging v. Perceiving leg of the Myers-Briggs continua.

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.

Behavioral Finance: Extroverted vs. Introverted Clients

Leave a comment

Extroverted Versus Introverted Clients and Their Financial Decision-Making

If advisors can recognize which side of the ledger a client occupies, they can better address the specific behavioral and cognitive biases he may bring to financial decisions.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on June 28th 2012

In our last article, we began drilling down on the four continua of personality that underlie the Myers-Briggs type indicator:

  • Extraversion v. Introversion
  • Sensing v. Intuition
  • Thinking v. Feeling
  • Judging v. Perceiving

An individual’s personality will give us vital guidance to that client’s psychological needs, behavioral patterns, and the way in which emotion interacts with the individual’s thought processes. Over the next few articles, we will take each of the four continua and individually drill down to provide ways that advisors might recognize which side of the ledger their clients occupy, and also give some ideas and advice as to how advisors can best work with clients and the specific behavioral and cognitive biases they may bring into their financial decision-making.

In previous articles we have given brief descriptions of the extroverted individual juxtaposed with the introverted counterpart, and offered a 10,000-foot view of their communication styles and tendencies toward certain economically irrational thought processes. It’s important to remember that even though clients are mostly introverted or extroverted, they are likely to still have traits of the other. So it would not be accurate to pigeonhole individuals into one classification. For instance, levels of comfort or security in specific situations and environments may help to fashion a person into an extrovert in comfortable, family-oriented situations, and an introvert in less-comfortable business meetings or social engagements.

Extroverts
Extroverts are often gregarious, confident, and prone to positive thinking. The extroverted individual would be outgoing and relatively less inhibited in interactions with others.

Following are some brief descriptions of observations common in extroverts that can help an advisor recognize an extroverted personality.

Observations of Extroverts
–Outgoing and friendly in social situations
–Self-confident
–Lovers of crowds, upbeat music, and community events
–Maintain large groups of marginal relationships but may have few close relationships
–Driven to sales and leadership positions in career choices
–Derive energy from others
–Good communicators
–More likely to engage in delinquent behavior as a child
–Generally self-classify as happy more frequently than introverted personalities
–More prone to react to pleasant events
–Better able to think positively in the midst of negative information or ambiguity

We believe extroverts to be inclined to exhibit active/emotional biases. Following are some behavioral finance biases we think should be expected in extroverted personalities:

Overconfidence Bias: Extroverts’ tendency toward self-confidence and need to exhibit this self confidence to manage social and business situations may lead to overconfidence. In situations where extroverts consider themselves to be well informed and socially positioned, they may believe so strongly in their own ability or knowledge that they will refuse to accept the input of others. The reason for their refusal might be the risk of taking a hit to their self-confidence should they be proven wrong.

Illusion of Control Bias: This bias may play into the extrovert’s love of crowds and community events. They are more prone to being swept into the joy of the masses. They will derive energy from the crowd. Extroverts’ self-confidence and illusion of controlling the situation are a large part of what allow them to be comfortable in crowds when introverts would be made nervous by their perceived lack of control.

Bandwagon Bias: Extroverts have a need for social interaction and thrive in social environments. For this reason we believe it more likely for them to exhibit a bias toward the social crowd, making them more prone to crowd behavior. They probably can’t help but chat up their office mates or cocktail buddies about their market performance. When they hear the consensus of the crowd, they may follow in order to avoid upsetting the social order.

Introverts
More introverted individuals can be shy, inhibited, and have tendencies toward self-doubt and reliance on others.

Observations of Introverts
–Self-conscious, often wondering whether they fit in or are doing things right
–Nervous
–Close to the vest
–More focused and able to maintain focus in social situations and over longer periods of time
–Shy in new or uncertain situations
–Tend toward private reflection instead of public discussion in decision-making processes
–Take their time to think deeply and reflect internally; you say they think before they act
–Get their energy from within rather than feeding off of others like an extrovert will; they may even find groups of people to be emotionally and physically draining
–They enjoy alone time and need it to refuel after stressful or nerve-wracking social encounters
–Some studies suggest introverted personalities are strongly correlated with “gifted” intellect
–Careers such as academics and computer programming
–More prone to react to negativity and see ambiguity as negative

We believe introverts may be more inclined to exhibit passive biases. Following are some behavioral finance biases we believe to be common in introverted personalities:

Aversion to Ambiguity: Introverts are prone to negative reactions in the midst of ambiguity, and this negative reaction can often lead to a barrier in financial decision-making known as the Aversion to Ambiguity. They may see the presence of ambiguity as a negative and avoid any decision or decision-making problem that requires them to recognize its presence.

Status Quo Bias: Because introverts tend to be more inward looking and feeling, they may prefer the status quo over possible change. It may be hard for them to convince themselves that they have the strength necessary to survive the changes.

Decision Fatigue: Introverts need to have inward reflection time and alone time. They are unlikely to be easily engaged in large strategy meetings and may need to take long conversations in chunks in order to be sure they have the time to internalize the issues and process the decision problem.

Next month we will have a more in-depth discussion and application of the Sensing vs. Intuition leg of the Myers-Briggs continua.

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.

Follow

Get every new post delivered to your Inbox.

Join 48 other followers