The Edge of Reason: The Psychology of Investment Decisions
Perhaps some of the most interesting blog debate I’ve read recently has been on Rod’s Personal Investment Strategies blog.
It’s been a while since I did any consumer behaviour research with financial institutions, but in many ways my journey into consumer behaviour and away from traditional consumer research began during a consumer focus group about pension choice, back in the 1990s.
It was the fourth long and tedious group discussion with people who were considering investing in a pension scheme, during which they told me how they wanted independent advice, a range of funds and a provider with good financial security. At the end, after everyone was getting up to go, one of the group asked another, who had been a little more vociferous than the rest, where he was planning to get his pension. The reply led to several of the group soliciting the details of someone who I recognised was an ‘industrial’ insurance salesman (i.e. not independent). What’s more, they didn’t ask who he represented, how financially secure his company was or how many funds he offered.
I realised that I was going away to write my report on what they’d all said; meanwhile they were all about go and do something entirely different.
I’m aware of studies that have found people tend to like stocks that have readable names (as opposed to abstract or technical-sounding ones), and that people tend to select things in general that begin with the same first letter as their own name.
These reflect the way the unconscious mind works, by generating a feeling based on familiarity, which is then consciously de-coded (erroneously) as being a ‘good’ choice.
Last week another study shed light on the power of the unconscious mind’s influence in this apparently rational world: a study conducted by the University of Haifa found that the investment selections of a group of investment advisers and accountants was strongly influenced by what type of article they were given to read before making a selection.
Those who were given an article on someone who took big risks and was successful, rated a stock they were shown as being more attractive (more valuable for investment) than those who were shown the same stock after reading an article about someone who had been successful after avoiding a risky decision.
All the participants gave their assessment of the fund on the basis of the same financial report.
So it seems an investment advisers advice might have just as much to do with what he’s read that morning in the paper, or a story he has heard from someone else, as it does a ‘rational’ assessment of the data for that company.
Studies like these on the power of priming don’t make for particularly comfortable reading for anyone who likes to believe they’re balanced, rational and analytically-minded. However, understanding the way our brains work is critical to understanding our customers’ behaviour.
Philip Graves
Source: University of Haifa (2009, April 28). Reading Reports Involving Risk-taking Affects Financial Decision Making. ScienceDaily.
Very interesting information. I’m always intrigued by that kind of things. Most of us really don’t understand how unaware we are. And most don’t mind being obedient consumers.
Anthony
Achieve the Inner Balance of a Zen Monk
so it comes down to those that know, those that don’t know, and those who don’t know they don’t know. hmmm i’m Putting my money under the mattress.
Don Shepherd
Fishing Central Oregon
It’s interesting to read how the rational and unconscious minds often pull us in opposite directions. Your point is well taken that people often think they want A but actually choose B because it fulfills an unconscious need, want or desire. It is good to bear this in mind.
If you are looking to invest your money though, at some point – unless you choose to navigate the investment world yourself – you will likely be forced to make a choice between various options and advisers available to you. In essence, you are trusting your future to advice of someone and their investing philosophy and strategy.
The question then becomes in whom do you trust and why do you trust them?
As you have been explaining so well in your blog, our buying decisions must fulfill some type of psychological need. In the case of investing, one must feel comfortable entrusting their life savings.
For some it is purely an emotional investment. They will invest with the person who makes them feel most comfortable or represents a philosophy they feel most comfortable with.
For others, such as myself, our comfort-zone is found by analyzing details and facts. Rod’s approach will likely not persuade the masses. Nor does he intend it to. It’s a targeted niche of investors to whom his strategy will appeal. He knows and understands the demographics of those whom he is targeting.
I have seen first-hand the results Rod’s methods of investing. The process through which he takes his clients is thorough, rigorous and intense. I can speak to this through personal experience as I am one of his numerous clients. And yes, even I had to go through the same battery of tools he uses to devise a plan tailored and targeted specifically to my risk tolerance and time horizon – which I might add is different than the risk tolerance of us as a couple. I would be remiss if I didn’t add that while the market has taken a hit in recent months, my portfolio has weathered the storm quite nicely given the current economic conditions.
Everyone has to find their own comfort level – after all its YOUR money and YOUR future that you are banking on. While past performance is not a predictor of future earnings or performance, I know where my comfort-level is an I’m very happy with the results I’ve achieved through Rod’s methodology and strategic investing.
Thanks for your time and consideration.
Respectfully,
Pam
Invest in Your Future
For the most part people are in a social hypnotic state of mind. It’s when we wake to learn more about what drives use do we take more control.
I aleays look forward to your post.
Lynn Lane
Success Strategies For Life
Success Today
We are more worried about making a bad decision and looking stupid than anything else…
Seize the Day,
Rob
Sales Expert For Small Business Owners
Personal Asset Protection For Small Business Owners
Who to listen to about this topic and what to listen to is getting more and more confusing.
Bob Kaufer
If you MOVE like the Tin Man, you will THINK like the Scarecrow and FEEL like the Lion
I’m with Pam. Just think for yourself. Others have so little knowledge of your specific situation.
Christian Haller
Good Food Fast & Easy
Healthy Italian Recipes
Well said.
I think that if we could peel back the barrier and look at what actually takes place in the brain as far as choices, decisions, etc. are concernedm we might all br very surprised.
Thanks
JC
JCMACKENZIE.COM
Butterfly Marketing
I think Im feeling like Don at this point. Could be the sleep deprivation.
SunnyMarie
http://www.sunnymarie.com
http://www.sunnymarie.wordpress.com
Hi Phil,
Thats oh so true! You cover some great points within this post! And Robs right on the money! People are more interested in not looking bad in front of their peers than actually getting ahead!
Duane
Super-ADVANCED Influence & Persuasion Training Proven to Quickly Create a Flood of Money Constantly & Continuously Flowing into YOUR Bank Account Like the Niagara Falls… 100% GUARANTEED!!
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“Studies like these on the power of priming don’t make for particularly comfortable reading for anyone who likes to believe they’re balanced, rational and analytically-minded. However, understanding the way our brains work is critical to understanding our customers’ behaviour.”
It’s so important to be able to see past what you WISH was the truth, to find out what really works and how we really behave.
You’re a clear expert when it comes to the determinants of human behaviour.
JJ Jalopy.
Coaching Marketing Expert
How to become a coach with JJ Jalopy
Phil,
You hit the nail on its head here.
We all want to think of ourselves as rational, prudent making wise decisions. So much the opposite is true.
John Ho
Numerology Expert Helps Understanding Personality for Better Influence & Persuasion (WordPress Blog)
Numerology Expert Helps Understanding Personality for Better Influence & Persuasion (Money Page)
I like your perspective. We get primed every second, no matter how much we like to think we’re in control, we aren’t. I have no idea what I’m writing, my subconscious mind is doing it all for me.
All the best,
Yann
How to Get Organized, Stop Procrastinating, and Set Goals for Small Business Success
Priming can be a blessing or a curse. As for investing, we all need to find an appraoch or a philosophy that we are comfortable with. Some people like to go with statistics, others use other criteria. No matter which way we choose we will probably not get optimum performance so we may as well be comfortable with our decisions.
Steve Chambers, The Sales Expert
Sales Eagles – Sales Coaching for high flyers
If I ever understand investing, I’ll let you know who I trust. Until then, thank you for the information!
Lisa McLellan, Babysitting Services – Babysitters, Nannies, and Au-pairs
More interesting info about how we choose. Puts up the alert that we all need to be more aware of how we are making our choices so we make one that best serves our real interests.
Pat
Internet Dollars for Business Owners
So, what part does the conscious mind play in our decision making — just to provide us with what we feel is a “logical” reason for making the decision our subconscious directs us to??? Certainly the conscious mind plays a role, and perhaps a dominant role in some decision making instances…or does it?
Health, Fitness — Darryl Pace
Fitness Product Review
The human mind is fascinating. We often make dubious decisions and justify them afterward with dubious information. Mark
small business marketing
ice cream marketing
Priming is so powerful and yes we do ned to wake up and take control of our present lives!!
David Power’s Hour
Expert in Hypnosis, Success Thinking and Practical Parenting