Does your team know enough about human behaviour?

And what do they need to revise?

18 books on matters of the mind.

This Insight is for YOU if you lead a Financial Service (fund, advice or planning) firm, and want your business to become – or maintain your position as – a ‘go-to’ place for answers to the big questions about money.

You already know the Consumer Duty demands that you avoid designing communications to exploit consumers’ information asymmetries and behavioural biases to cause foreseeable harm.

So far so obvious – and these new FCA rules are just detailed examples of the ‘fair and not misleading rule’ – which we’ve had for years.

And, as Plato said thousands of years ago:

Good people don’t need laws to tell them to act responsibly while bad people will always find a way around the laws.

That said, these Consumer Duty clarifications drive a need for various tasks:

  1. To check your current communications for inaccurate or imbalanced content. And such content persists, even on the websites of otherwise trustworthy firms.
  2. To train your team on the key aspects of human behaviour that could expose your clients (or your team members) to financial harm.
  3. To create clear educational content for clients and prospects – to reduce that knowledge asymmetry on key financial issues.
    • And in early August 2023, the FCA emphasised the need to get pro-active in this area.
    • They’ve confirmed that ‘general guidance for the public’ cannot be defined as a ‘personal recommendation’ – learn more here.
    • So, if you needed a green light to expand your content library – you now have one.
  4. To offer content that explains how the financial planning process can help clients reduce the risks from:
    • Their natural behavioural biases.
    • Their flawed or incomplete beliefs about various money (investing, tax, insurance or financial planning) matters.
    • Their day to day habits – which, FYI, are thought to account for c. 45% of our day to day actions!

You might also want to consider creating content to outline the evidence of what drives our happiness – and show how financial planning can contribute to it.

I’ve written such a guide for one FS firm and it’s being received extremely well with their clients and prospects.

If you think you may need help with any these questions, book a date and time that’s convenient for you, here.

What does your team *really* understand about human behaviour?

In my experience, there are still many financial advisers and others working in Financial Services who don’t know as much as they need to about behavioural science.

This is an enormous area and few advisers (and fewer clients) could describe (with accuracy and balance) many of the concepts covered in the books listed at the top of this page.

So, those in Financial Services could gain enormous value from learning more about these fascinating areas.

What’s more, these topics engage people far more than the number-crunching and chart-heavy topics around investing and tax etc.

Of course, behavioural biases are just one part of the human behaviour puzzle, but let’s open up this topic now.

What are behavioural biases, and why do they arise?

Our behavioural biases are the thinking or emotional errors we make when interpreting the world around us and can lead to seriously flawed judgements and decisions.

Academic research acknowledges that managing and planning our money can be a hugely complex and challenging set of tasks.

So, financial planning requires careful thought, and understanding and managing our biases is enormously helpful for that.

Our biases arise for four main reasons:

  1. We don’t pay enough attention to what we’re doing:
    • We all need to ‘switch-off’ and rest from time to time. But, based on US data, the average adult does not pay attention for about half of each day! 
  2. We react emotionally to events.
      • The Chimp in our brain (from Steve Peters’ Chimp Paradox model) responds emotionally to basic drives (for pleasure, security, pain avoidance etc) and is much stronger than our calm, rational (human) mind.
      • Our Chimp is definitely not a long-term planner!
  3. We have skill or knowledge blind spots.
    • We’re unlikely to make good decisions if we don’t have the ability to assess complex questions or compare different financial options. And we’re very likely to fail if we hold flawed instructions (‘Gremlins’) in our computer – the part of our brain which, according to Peters, stores memories and autopilot instructions.
    • So, as with a physical computer, the GIGO (garbage in, garbage out) rule applies.
  4. Our brains seek to save energy by using mental shortcuts. Who wants to think hard all day – it’s exhausting. So, to save energy and speed up decision-making, our brains simplify complex subjects and rely heavily on the common-sense rules of thumb that are held in the computer. But sadly, those rules are seldom golden!

The truth is that what we believe to be a fact (or a helpful way of thinking) is quite often not.

So, we carry attitudes (towards people, events and things) that don’t serve us well.

Who’s affected by behavioural biases?

Biases affect our decision-making ability in all contexts (Family, local Community, national and geo-political, Sports, Educational and Work, including financial management)

For example, who do you know (at home or at work) who:

  • Only pays attention to news that confirms their opinions.
  • Blames outside factors when things go wrong.
  • Attributes other people’s success to luck but takes personal credit for their achievements.
  • Assumes that everyone else shares their political opinions, values or beliefs.
  • Learns a little about a topic and then assumes they know all about it?

And is that person us sometimes? 😉

The truth is that biases are easy to spot in others, but less so in ourselves.

That’s one of our biases too!

Dunning KrugerThis chart illustrates the Dunning-Kruger effect – and the dangerous point where, with very little knowledge, we believe we’re a lot more capable than we are.

We all suffer from these biases, so we need to be aware of them, especially those which can affect our wealth, health and happiness. And many of our biases do exactly that.

When we judge the world around us, we may think we’re being objective and logical in evaluating all the available information… but this is seldom the case.

Most of our thinking is challenged by one bias or another, and Psychologists have, so far, identified nearly 200 biases!

So, if you’re going to train your team (and offer fascinating content to your clients and prospects) you need to decide which of those many biases you want to focus on.

FYI, I’ve identified twenty biases that I think are particularly relevant in a financial Planning context, and I’m happy to help your team understand these biases and create content to help your clients understand them too.

Just e-mail me here if you’d like to talk about this some more.

And thanks for dropping in

You can sign up to my newsletter here,

And, as a thank you, I’ll send you my ‘5 Steps for planning your Financial Freedom’ and the first chapter of my book, ‘Who misleads you about money?’Newsletter Sign up. Paul Claireaux 2020Also, for more frequent ideas – and more interaction – you can join my Facebook group here

Share your comments here

You can comment as a guest (just tick that box) or log in with your social media or DISQUS account.

Discuss this article