Success as a Financial Advisor For Dummies

Chapter 12

Getting Up to Speed on Behavioral Finance

IN THIS CHAPTER

Dealing with the irrational side of financial decision-making

Talking some sense into insensible clients

Preventing fear and greed from undermining solid financial plans

To find true success as a financial advisor, you must be able to guide your clients through the labyrinth of their own emotional decision-making process. Millions of years of evolution haven’t been able to erase the fight, flight, or freeze mechanism hardwired into the human brain. Although this mechanism has been a key to human survival in nature by protecting against physical threats, it’s often counterproductive when applied to relationship and investment decisions. In the world of personal finance, when markets are rising, clients get aggressive and want to jump in; the instinct to fight drives their greed. When markets drop, clients panic and look for the exits; fear drives their instinct to flee.

In this chapter, I introduce you to the topic of behavior finance — the study of the role that human psychology plays in investor decisions and hence market movements. Here you develop an understanding of the emotional and irrational factors that ...