March 4, 2024

Behavioral biases can hamper an investor’s strategy. But a financial advisor who understands the psychology behind how people make decisions can help clients identify the emotions that shape their thinking and make them better investors.

A new white paper Arnerich Massena, an investment firm in Portland, Oregon, examined the findings of behavioral economists and suggested strategies to improve decision logic and processes. Advisors can play an important role in this, helping to develop and maintain a disciplined investment strategy that puts investors at ease and enables them to maintain some emotional distance, the newspaper said.

Dan Grote, a behavioral finance consultant with Latitude Financial Group in Denver, said being aware of the mental shortcuts and emotions involved in the decision-making process is especially important in guiding clients through the current market volatility.

“In these moments, they can become reactionary and make emotional decisions,” he said. “We can help them get through it and give them a stronger foundation to understand what their master plan is and why we’re doing what we’re doing.”

Ernst & Young The study found Investor behavior has changed in the face of heightened market volatility, with more than 70% of respondents saying they have changed their investments due to a decline in portfolio value.

“Given continued market volatility, investors now have many questions and are hungry for advice,” Mike Lee, global wealth and asset management leader at EY, said in a statement. “Ongoing market pressures are reinforcing their defensive stance and willingness to switch and grow portfolios.”

Overconfidence and confirmation bias are just two of the most common behavioral biases among investors, the paper says. This means that clients may overestimate their own skills, knowledge and abilities and view information through the lens of existing beliefs.

“These behaviors are very difficult to self-diagnose,” Grotter said. “It leads investors to continue down the ‘do-it-yourself’ path when it comes to their portfolios.”

Scroll down the card to see five tips from the white paper on how to overcome behavioral bias and maintain discipline in your investment strategy.