The Psychology of Investment Decisions: Follow Up

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I’d like to pick up on a long reply to yesterday’s post because I hope I can be more constructive than I was able to be yesterday.

Here’s is Pam’s reply to yesterday’s post:

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
Well the first thing I’d like to say is that I’m sorry if Pam took it as an indirect attack on her and Rod’s business, it certainly wasn’t intended to be.

Secondly, Pam’s reply didn’d address the key point of the research I was reporting: it was investment advisers whose judgment was influenced (primed) by what they had just read, although no doubt consumers are susceptible to being primed in the same way.

So how could someone in the investment business use research like that which I referenced, which opens a veritable can of worms regarding the veracity of investment advice?

From the point of view of the investment advice they offer, other research on subliminal influence and priming shows that its effects are reduced, or removed altogether, where people are aware that something could prime them. So, provided Rod recognises that he could be unconsciously primed to give different advice on the basis of what they read and hear, they are somewhat less likely to do so.

[Incidentally, I’m certain that none of the very rational and analytical investment advisers and accountants that took part in the research believed their advice was the by-product of something they’d just read. This isn’t a reflection on the individual, it’s a reflection of how our brains work.]

Perhaps more importantly this information is an opportunity for them to differentiate from their competitors. In their position this is exactly the sort of information I would communicate to potential clients, along with an overview of the systems in place to make the advice offered as rational and robust as possible (something that seems to be a real strength of theirs).

Rest assured, there is nothing like providing a genuine source of anxiety in your consumer’s mind regarding the risk of using a competitor, for that competitor to seem far less attractive. Handled the wrong way knocking the competition can be alienating, but when you have scientific studies to quote it’s not you that’s doing the knocking, it’s implicit (or explicit if you point out that “very few other investment specialists are aware of the fact that…”).

I hope that this makes for a more constructive post.

Philip Graves