How Your Clients Can Ruin Even the Best-Laid Plans

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Client inertia and procrastination can put your financial plans on the back burner.

By Justin Reckers and Robert Simon

Originally published by on August 18th 2011

“The best-laid schemes of mice and men go often askew, and leave us nothing but grief and pain.”

This is an English translation of a piece of wisdom written by Robert Burns in 1785, and it rings true today. We know many advisors who wonder why their clients don’t follow up on the well-laid plans they propose. They wonder how a client can pay for the professional advice of a financial planner and then not follow it. They wonder why intelligent and responsible individuals and families can let the financial safety, security, and well being of their loved ones fall by the wayside. They wonder why a husband and father cannot bring himself to follow through on placing an inexpensive life insurance policy to insure against the loss of their income in the event of death. They wonder how a wealthy patriarch can pass away without having made the plans necessary to provide for conflict-free administration of their estate.

There are many reasons why even the best-laid plans often go awry, such as barriers to progress and biases that create delays. Procrastination and inertia are common barriers caused by cognitive and emotional bias that advisors can easily observe and in many cases just as easily implement a positive effect. Understanding the root cause of your client’s aversion to progress can have an amazing effect on the results of your hard work and the client-advisor relationship. No advisor likes leveling advice and sending a client away with a to-do list only to never see him again.

We all learn about the concept of procrastination at the moment we are given responsibility for a chore as children. In psychology, procrastination refers to the act of replacing high-priority actions with tasks of low-priority, ultimately putting off important tasks to a later time. Some psychologists believe procrastination to be a mechanism for coping with the anxiety associated with starting or completing tasks or decision-making processes in the presence of uncertainty or risk.

Inertia is the resistance to a change in a state of motion or rest, or the tendency to resist any change. The force of inertia is proportional to an object’s mass. In this case the object is a financial decision. The bigger the financial decision, the greater the role the force of inertia will play upon your clients’ ability to make progress.

So what causes procrastination and inertia in financial decision-making?

Status Quo
Status quo bias is the tendency for people to like things to stay relatively the same because the disadvantages of change loom larger than the advantages. When a client has a preference for the status quo they may procrastinate by replacing the high-priority tasks of enacting your financial-planning recommendations in the interest of less important and far less anxiety-producing tasks like organizing files or planning for events far into the future. They do this in order to reduce the importance of the anxiety-provoking decision problem you have laid out in front of them. They may also be seeking an answer to the problem that perpetuates the status quo. In the absence of such an option, they might shut down and attempt to remove themselves from the decision-making problem. This is a defense mechanism to reduce the stress they encounter when forced to make a change. This is inertia.

A preference for the status quo might be encountered in a client with any number of different underlying cognitive biases. Aversion to loss can lead your client to prioritize the realization of gains over the realization of losses. In doing so, he will have diminished the importance of realizing losses and ultimately they will have decided doing so was not necessary.

Endowment Effect
The Endowment Effect is another common cognitive bias that often leads to inertia. It can be a form of Status quo bias because a client can wind up overvaluing a home or other asset he currently owns. He may ascribe value to the asset in a way that perpetuates the status quo. If you overprice a home it is not likely to ever be sold, and the status quo is maintained.

The strong desire to keep things the same can cause opportunities to be missed and the best-laid plans to go awry. Dollar cost averaging is one of the old school mechanisms for combating inertia. Dollar cost averaging removes the necessity for an investor to make a decision about whether to invest each month. By removing that decision, the inventor of the program has removed the negative effects of inertia in financial decision making.

In recent years behavioral economists have been studying the cause and effect of inertia and have sought ways to positively affect decision-making through its application. “Opt-out”-style retirement plans are becoming more common. In an “opt out” plan employees are automatically enrolled in a company-sponsored retirement plan, often with a small contribution from the employer. They are given the opportunity to opt out of the plan only. There is no paperwork to fill out and box to check in order to participate. Everyone participates unless they opt out. Research shows most will opt to stay thanks to the effects of inertia and bias toward the status quo. The inertia of employees means more will participate in opt-out-style plans, and the greater financial good of Middle America will be better served.

Day-to-day financial advisory practices would be well-served to build in more high-touch client interaction with those they suspect might tend toward procrastination. Regular follow-up including timelines, meeting notes, and to-do lists can help increase accountability for procrastinators who might feel the pressure of an upcoming follow-up meeting to be significant enough motivation to get the job done.

We will continue our Applied Behavioral Finance series next month with a look at what we call the Blue Screen of Death in Financial Decision Making to close out the summer followed by a holiday-themed topic to kick off the season’s shopping in October.

Justin A. Reckers, CFP, CDFA, AIF is Director of Financial Planning at Pacific Wealth Management and Managing Director of Pacific Divorce Management, LLC, in San Diego.

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

Applied Behavioral Finance in Fundraising

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The National Multiple Sclerosis Society has learned the value of Mental Accounting over the past few years. A brilliant fundraiser arranged for a check box to be added to state income tax returns. Filers simply check the box to donate part of their anticipated tax refund to the National MS Society. Over $1,000,000 has been raised thanks to the simple check box. Benefactors are donating money that do not yet count as their own and in many cases weren’t expecting in the first place making it far easier to convince them to part with it. As of Spring 2010 Louisiana, Oklahoma, Colorado, Delaware, Missouri and Wisconsin had passed legislation to add the check box to state tax returns.

Raising money is not the only benefit of the check box. It also raises awareness about the disease.

My Endowment in the Mega Millions Jackpot

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By Justin A. Reckers

I purchased a ticket for the Mega Millions California Jackpot for the first time yesterday. How could I not with the Jackpot at $355,000,000? I convinced myself spending $20 for 20 individual chances at winning $355,000,000 was a rational decision even though my odds of winning were somewhere near 1 in 176,000,000. My decision was made based on the idea that the expenditure was an entertainment expense because I obviously didn’t plan on winning.


After I left 7-11 with my wife and kids in the car and California Lottery tickets in my pocket we began discussing what we might do if we won. Would we take the lump sum payout? If so, how much would that be. How much would we have to pay in taxes? Ultimately we decided we might have about $135,000,000 to spend after discounts for taking the lump sum and paying taxes. Then we started talking about how we would spend it. Maybe we would buy a bigger house on the beach in our current neighborhood. But not a disgustingly huge one, that would be a waste.

Finally the time came to check to see if we had won. Unfortunately, the answer was no. In fact, no-one won the Jackpot in California. I was actually disapointed. I knew the odds were against me from the second I contemplated buying a ticket. So why did I have an emotional reaction to the realization that I was not a winner?

I had developed a feeling of Endowment or ownership in the jackpot. The mere act of fantasizing what we might do with the winnings led me to create an emotional attachment to the fantasy. It was only natural that I would be disapointed when I realized I was not a winner and the fantasy was taken away.

Endowment Effect refers to the human tendency to place a higher value on objects we already own compared to those we do not even in situations where the two objects are identical. People often demand much more to give up an object than they would be willing to pay to acquire it. Dan Ariely proved this theory in experiments using coffee mugs. These economic anomalies occur because a person’s Endowment in an object often comes with emotional attachment. I created an emotional attachment to the California Mega Millions Jackpot the moment we started fantasizing about how we would spend it. The fantasy created a feeling of endowment in the winnings that I would never receive.

I suspect the marketing team at the Mega Millions office is well aware of Endowment Effect. It is a very powerful marketing tool. Just sit back and imagine all the wonderful things you could do with $135,000,000. Now go out and buy your tickets.

Justin A. Reckers, CFP, CDFA, AIF is Director of Financial Planning at Pacific Wealth Management and managing director of Pacific Divorce Management, LLC, in San Diego.


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