Brie P. Williams, Head of Practice Management, State Street Global Advisors
Financial decisions often stir up powerful emotions and awaken old habits. Being an effective sounding board demands technical knowledge of planning and investing, as well as an understanding of how behavioral economics can impact a client’s decision-making process.
In part one of this series, I explained the cognitive bias “anchoring” and how it can affect financial decision-making.
In brief: Anchoring is a term used to describe the common tendency to rely too heavily—or “anchor”—on just one piece of information when making decisions. The bias comes into play when an individual fails to appropriately adjust to any new information because they are anchored to an original reference point.
Here, I’ll explore both optimistic and pessimistic mindsets and address how to find a balance with all clients when it comes to financial decision-making.
Pessimism and optimism in finance
A mindset can shape the way information is processed and how an individual arrives at decisions.
Anchoring influenced by optimistic or pessimistic tendencies can lead to material differences in future outcomes when it comes to investors’ portfolios and financial wellbeing.
Both optimism and pessimism have their strengths and their flaws—especially when taken to extremes. The solution is to find the middle ground in an effort to close the behavior gap; neither of the two principles should be ignored or over-relied upon.
Coaching clients to find a balance between healthy amounts of both optimism and pessimism may be challenging, but providing the right level of support can help clients become more self-aware of their behavior and subconscious tendencies, and improve their financial decision-making.
For more, please read the rest of the post originally published on the SPDR Blog on May 28.
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