Personal biases that affect investing decisions are surging among investors, and to some extent among advisors, according to the 2021 BeFi (behavioral finance) Barometer study by Schwab Asset Management released today.
The study, which questioned 300 advisors, including wirehouse representatives, RIAs, and independent regional and national broker-dealers, revealed that the impact of personal biases are being felt more dramatically now than before the pandemic began. The study, which is in its third year, was conducted by Cerulli Associates for Schwab Asset Management and the Investments and Wealth Institute.
Two of the most common biases are ‘recency bias,’ the influence current events have on decisions, and an aversion to loss. Both have grown in the past two years. Fifty-eight percent of advisors said their clients are more influenced by a recency bias now compared to 35% two years ago. Forty-three percent said clients are influenced by a fear of loss, compared to 26% in 2019.
Taking behavioral finance into consideration is particularly important now because traditional financial theory cannot reflect how investors or the markets are going to react to current events, said Omar Aguilar, chief investment officer and head of investments at Schwab Asset Management, during a panel discussion of the study’s findings Friday.
Behavioral finance is a combination of economics and psychology, which incorporates the human element into investment decisions, he added. It helps advisors understand how their clients absorb and use the vast amounts of information that is available. Incorporating this human element into investment decisions can help clients make better decisions.
“Having more people work at home makes them more vulnerable to an overload of information,” Aguilar said.
Aguilar added in a statement, “There has never been a more critical time for advisors to incorporate behavioral finance techniques into their practices to understand and help clients stay on course to reach their long-term financial goals. The combination of pandemic-driven uncertainty, market volatility, and speculative investing trends have culminated in an environment where behavioral biases thrive.”
Asher Cheses, associate director of wealth management and consulting at Cerulli Associates, said the influence of social media on decision making today cannot be exaggerated. Fifty-two percent of advisors said they often or sometimes are asked by clients about things they have seen on social media.
Clients frequently favor investment opportunities they see on social media but the choices are often inappropriate for the client, the study said. Advisors who can incorporate behavioral finance into their advice are often able to prevent their clients from making bad decisions.
“Advisors can always use behavioral finance techniques to their advantage, but in times of market uncertainty, such skills can be a true differentiator,” Cheses said in a statement.