Behavioral Finance: Sensing vs. Intuitive Clients

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Sensing Versus Intuitive Clients and Their Financial Decision-Making

Determining if a client is more aligned with the sensing or intuition 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 July 23rd 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 into that client’s psychological needs, behavioral patterns, and the way in which emotions interact with and interrupt financial decision-making.

Last month we reviewed the Extroversion vs. Introversion continua. We offered observations of both extroverts and introverts and uncovered some common biases and barriers they 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 Sensing vs. Intuition preference. This overview will help you as an advisor to recognize which side of the ledger your clients occupy and give some ideas 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 briefly outlined the “sensing” individual juxtaposed with the “intuitive” 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 sensing or intuition preference gives advisors two huge pieces of information about how best to work with them.

1) How do they learn?
2) How do they perceive the future?

Clients are mostly sensing or intuitive but are likely to still have traits of the other. So it would not be accurate to pigeonhole individuals into one classification. However, we will discuss them as two separate categories for purposes of contrast.

Sensing 
Sensing individuals are attentive and immersed in the sensory intake from every environment they encounter. The individual exhibiting the psychological preferences of a sensing personality will use quotes like “live for today,” “here and now,” and “bottom line.”

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

Observations of a Sensing Client
–Detail oriented
–Takes mental pictures
–Remembers events based on literal experience
–Concerned with the present
–Occupied by what is actual and tangible
–Trusting of experience
–Pragmatic
–Learns from practical application

We believe sensing individuals to be inclined to exhibit more passive biases. Following are some behavioral finance biases we believe should be expected in sensing personalities along with brief descriptions. The three biases below are different but interrelated, as you will see from the explanations:

Status Quo Bias: Sensing clients are concerned with the present, the here and now, and will have trouble committing to a deliberate conceptualization of the future. Because of this concern for the present, they will exhibit a bias toward the status quo and an aversion to change.

Aversion to Ambiguity: Sensing clients are occupied by what is actual and tangible, and just as they have an aversion to change, they have an aversion to the future. They are preoccupied with understanding the present and sensing the effect of the forces around them in a given moment. They require the details and the availability of current information, so the ambiguity represented by the future may cause them to withdrawal.

Inertia: Sensing client can be very detail oriented and pay so much attention to the current facts that they miss new and different possibilities, which can lead to inertia. The preference for the status quo combined with the heightened awareness of current tangible details will cause the sensing client to miss opportunities for progress.

Intuition 
Intuitive individuals are likely to be more future oriented and more capable of conceptualizing what might be possible. They will also be more skeptical of the future and always be calculating different angles and reading between the lines.

Observations of an Intuitive Client
–Remembers events based on an impression of the experience
–Constantly tries to read between the lines
–Learns by thinking through every angle
–Adventurous
–Trusts gut feelings
–Day dreamer
–Can be scatter-brained, jumping from one place to the other
–Thinks more of the future than the past

We believe intuitive clients may be more inclined to exhibit active biases. Following are some behavioral finance biases we believe to be common in intuitive personalities, with brief descriptions.

Analysis Paralysis: Intuitive individuals are always seeking deeper meanings in situations. In divorce negotiations, for instance, we commonly see intuitive clients balk at financial settlements offered them without consideration. The common reasoning is, “if my former spouse is offering it to me, it must not be a good deal.” The intuitive client may look for hidden meanings and wind up allowing a feeling that things are too good to be true hijack decision-making.

Framing Effect: Intuitive people remember events and learn based on impressions. In the case of a memorable event, they may associate a feeling or a thought they had in the middle of the memory. They are constantly looking at all angles and seeking a different frame of reference for the memory or the learning experience. Because of this, they may be prone to framing effect or the tendency for people to draw different conclusions based on how data is presented. This includes the tendency to ignore that a solution exists, because the source is seen as an “enemy” or as “inferior” (see above).

Optimism Bias: Because intuitive individuals tend to trust their gut feelings, they may believe they are less at risk of experiencing a negative outcome. They simply believe the gut feeling they have based on their own knowledge and experience is the best resource to rely upon–which can lead to unrealistic optimism.

Next month we will have a more in-depth discussion and application of the Thinking vs. Feeling 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

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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.

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 MorningstarAdvisor.com 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 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 and Long Term Care Insurance

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Behavioral Finance and Long Term Care Insurance

Long-term care insurance is a thorny, multifaceted issue.

By Justin Reckers and Robert Simon

Originally Published by MorningstarAdvisor.com on March 17th 2011

Last month we touched the subject of Behavioral Finance in Life Insurance decisions and saw quite a bit of feedback from the readership. Some was good, some was bad, some was indifferent. Many readers took the discussion of sales tactics pretty hard and felt the need to defend the insurance-sales industry. We want to stress again the underlying concept of the article was far from being a definitive answer to the perennial question of whether investors should buy term and invest the difference. It was certainly not aimed at impugning the sales tactics of the life insurance industry. Rather, we seek to uncover the relationship between emotion and economic theory at the point of financial decision-making. Make observations about the drive of each power and help others understand how these observations can be used in practice to help everyone make better financial decisions through applied behavioral finance.

This article focuses on long-term care insurance. We will look at the product itself, the emotional aversion or motivation to its use as well as how and why state and federal governments have gotten involved to help promote the economic “rationality” of the product.

Unlike life insurance, long-term care does not have an easily quantifiable probability of paying benefits. In order to receive benefits under a long-term care policy an insured must be considered chronically ill and unable to perform certain activities of daily living. Very few consumers understand what this means before meeting with an insurance agent. The ones that do will have been in a position to provide the necessary care for a loved one at some point in their lives. Those who have been in the caregivers role in the past will understand the two main reasons for most people to purchase long-term care insurance 1) protect against the potentially devastating effect of the cost on other financial goals and plans and 2) insulate the caregiver from the negative physical and financial affects of their role.

The first step in uncovering the emotional component of this step in the planning process lies in the client’s ability to comprehend the emotional cost of long-term care. Many will not immediately consider the emotional cost to their loved ones of providing care on a day to day basis. Many people will have a more visceral aversion to accepting care in a nursing home or other facility and completely avoid the conversation about long-term care. This may be rooted in an aversion to change or bias towards the status quo or a lack of understanding around the options they have for their care.

We believe that concern for caregivers is one of the greatest components of the underlying need for long-term care insurance. Helping clients connect the concern they have for the well-being of their spouse and children with the possibility that they may be the exact people charged with their daily care should help develop an emotional connection and motivation towards considering long-term care insurance.

Once the emotional connection is made the client should be more open to understanding the availability of in-home care versus nursing home care and all of the other truly valuable terms of current long-term care insurance products. Working through these policy provisions and concentrating on the options available for minimizing change should help remove the status quo bias of many clients who believe long-term care is only for nursing homes.

State and federal governments believe long-term care insurance is economically “rational,” at least from their perspective, and have thrown their support behind it in the last fifteen years.

The federal government most recently got involved in promoting long-term care insurance through a provision in the Deficit Reduction Act of 2005. The DRA created a national long-term care partnership program allowing each state to set up their own programs combining private long term care insurance as the primary payer of benefits with Medicaid as the secondary payer once the private policy benefits have been exhausted. Individuals are then allowed to protect a portion of their assets instead of spending them down to qualify for Medicaid coverage. The beauty the program is two-fold. Individuals are rewarded for planning ahead and purchasing long-term care policies while state budgets are preserved by requiring that the benefits of those qualifying insurance policies be paid before Medicaid benefits can be accessed.

Many states have followed the Fed’s lead and developed long-term care partnership programs over the years. The states want individuals to provide for at least a portion of their own care. In order to facilitate this they have developed plans that mandate certain provisions and guarantee asset protection strategies under Medicaid law. The details of each state program differ but the underlying idea is one rooted in behavioral finance. The states want citizens to buy long-term care insurance because Medicaid will be next in line to pay the costs if individuals do not plan for it themselves. More individual long-term care insurance means less drain upon state Medicaid budgets. Richard Thaler might call this “libertarian paternalism.”

The evolution of long-term care insurance products as well as state and federal government encouragement of their use has led to a tremendous increase in its use as a financial planning tool. So does it make economic sense? Clearly the state and federal powers that be have decided long-term care insurance makes economic sense and have chosen to throw their weight behind it via partnership programs and tax-qualified plans. They believe, from an actuarial perspective, an increase in individual coverage will help reduce state expenditures through Medicaid and bolster state budgets.

Economic “rationality” from the consumer side is complicated by the myriad of options and choices available in the market place today. Different options make economic sense for some and do not for others. A partnership policy makes little sense for a high-net-worth individual since the Medicaid asset protection likely has no value. We care more about getting to the bottom of the emotional motivation for clients in this case to help facilitate “rational” decision-making. The state and federal government support is just another great example of government involvement in our everyday financial decision-making.

We will continue our applied behavioral finance series next month with observations and applications in estate planning and probate.

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.


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