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Appreciating Transferrable Applications in Behavioral Finance

By Sidney A. Blum CFP® CPA/PFS ChFC

By Dr. David E. Marcinko MBA

Whether making medical decisions or financial decisions, both are influenced by emotions. The role of emotions, when making financial decisions, has transferable application in the world of medical decisions.

What Role Should Emotion Play in Financial Advice?

Financial advisors know that one of the most important components of providing financial advice is discussing client goals. Inherently your goals are tied to how you see yourself and in what ways you see your money and net worth as a reflection of yourself. This aspect of your financial life is usually tied to emotions based on perceived positive or negative experiences in your life.

Financial advisors find that they expend considerable time and energy addressing emotions and negative reactions to events in clients’ lives. The goal is to move the focus toward positive steps for reaching client goals. As with other aspects in your life, emotional reactions can distract you from well reasoned actions that benefit in the long run. This is the reason it is beneficial to engage a financial professional to guide you through your financial life circumstances with advice driven by goals rather than emotional negative reactions.

Emotional Intelligence

The use of Emotional Intelligence is a learned skill set. Financial Advisors who are skilled in understanding the four basic emotions that guide them and their clients will find they are more successful in their chosen work!

The Four Basic Emotions

The four emotions are: Glad, Sad, Mad and Scared. These four basic emotions are neither good nor bad – they just “are”!

It is one or more of these emotions that help determine just how “risk adverse” a client will be. It is absolutely necessary for a financial advisor to be aware of the client’s emotional state, whether the client is aware or not. People react emotionally to market downturns. They are probably scared first, but also mad and sad as the market changes. They may get caught up in the market’s emotional swings and lose sight of their own goals and strategy. They think it will always stay that way. Or in an upturn, they believe the market will always stay up. They get caught up in the euphoria of “glad” and again lose sight of their goals and strategy. Many people get caught up in the high market frenzy and end up buying shares that are overpriced; even doctors.

Examples:

Pulling out of the market to protect temporary downside losses in value also means not participating in the upside, which eventually occurs. From the major downturn in the spring of 2009 to the fall of 2009, the market recovered better than 35%. Those who pulled out of the market and stayed out missed out on that portion of their own portfolio’s recovery. Due to reacting emotionally, people buy in up market and sell in a down market – the opposite of what garners them a good return.

Another difficulty is that people lose sight of the fact that a fund investment is in actual companies – some of which survive and some don’t. The nature of the investment market is that there are no guarantees on return of investment. A certain amount of volatility is normal. It is the price you pay for the opportunity of garnering a higher return than with “safe” investments.

And, how safe are “safe” investments? If your “safe” investments are earning 1% while inflation is running at 3% as is the case in 2012, you are losing purchasing power. If the bucket is leaking slowly, it can still end up empty!

So when you feel “glad” about a safe investment, what may be a good feeling may turn out to be a bad investment.

How Advisors Help Clients

How does an advisor help to keep their clients’ focus on the positive steps that can be taken to meet goals instead of reacting solely to current market conditions? How does advisor keep from getting involved in the client’s negative and unproductive emotional reactions?

Financial advisors have seen these situations before, but clients may not be aware that financial markets tend to return to the norm and provide a positive return in the long run. By helping provide a perspective on how the market normally behaves; the focus can be shifted from how the market currently stands, a temporary fluid condition, to the longer range behavior of markets. This provides a sense of stable emotions that allows the client and the advisor to make better financial decisions.

Non-Monetary Goals?

A financial advisor can also help you realize that financial planning is more than investments and that some goals are not solely monetary. It is less stressful and far more productive for people to keep their eyes on their goals, not on the dollar value of their portfolio. In the end, your net worth is not the same as your self‐worth.

• How Well Behaved Are Your Financial Decisions-Doctor?
• Understanding Behavioral Finance and Economics

Assessment

Because emotions play a significant role in all decisions we make, a major part of an advisor’s job is to help the client keep their focus on the positive steps that can be taken to meet those goals instead of reacting based solely on emotions!

About the Author

Sid graduated from the University of Illinois with a degree in accounting and has been practicing as a CPA since 1975 and financial advisor since 1987. Sid received the CERTIFIED FINANCIAL PLANNER certification in 1987 and in 1988, received the AICPA Certificate of Education Achievement in Personal Financial Planning. In 1989, Sid received the designation of Chartered Financial Consultant (ChFC) and in 1991 the AICPA specialty designation of Personal Financial Specialist (CPA/PFS).

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

• PRACTICES: www.BusinessofMedicalPractice.com
• HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
• CLINICS: http://www.crcpress.com/product/isbn/9781439879900
• ADVISORS: www.CertifiedMedicalPlanner.org
• FINANCE: Financial Planning for Physicians and Advisors
• INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security
• Dictionary of Health Insurance and Managed Care

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Filed under: Ethics, Financial Planning, LifeStyle | Tagged: behavioral finance, Emotional Intelligence, Four Basic Emotions, Investment Advice, Medical Decisions, Sidney A. Blum, www.glfoa.com | 1 Comment »