14 Sep Customer Behavior
*Why you need an advisor?*
We often underestimate emotions and tend to believe that decisions about money and life are “rational” in nature.
In this context the role of an advisor remains that of selling a fund.
Identifying funds (the best ones) from amongst thousands of funds is a rational analysis best performed by a machine (robot).
Therefore, if fund selection is the basis of advisory, then it is almost impossible to beat the machine.
But, if managing complex human behaviour (human emotions) is the basis of advisory then it is almost impossible for a machine to beat a man.
And the good news is investment is largely a behavior management service.
Let’s look at a few examples to exhibit the nature and behavior of people and see for ourselves how emotions triumph over reason.
1) Tom is on a diet and agrees to go out on a business dinner, thinking that he will be able to limit himself to one glass of wine and no dessert. But the host orders a second bottle of wine and the waiter brings by the dessert cart, and all bets are off.
2) Marilyn thinks that she can go into a department store when they are having a big sale and just see whether they have something on sale that she really needs. She ends up with shoes that hurt (but were 70 percent off).
3) Similar problems affect those who have problems with quitting smoking & alcohol, a failure to exercise, excessive borrowing, and insufficient savings.
As human beings we think something and we do something quite the opposite.
When we plan we think logically but when an easier path shows up almost always our temptation / greed gets the better of us and we let go the planned route by succumbing to the temptation of the easier path.
Self-control problems can be illuminated by thinking about an individual as being made up of two individuals,
1) A far-sighted ‘Planner’ and
2) A myopic ‘Doer.’
You can think of the Planner as speaking for your Reflective / Thinking and Planning System and the Doer as heavily influenced by emotions and temptations; the intuitive person who can act without giving it a thought.
The Planner is trying to promote your long-term welfare but must cope with the feelings, mischief, and strong will of the Doer, who is exposed to the temptations that come with arousal.
One part of the brain gets tempted while the second part shows us ‘reason’ to stay invested.
Unfortunately the first part almost always prevails over the second unless and until it is aided by an external force known as “sound advisory”
In investing, all is hunky dory when one is planning investing.
1) Long term need
2) Conviction in the economy
3) Conviction in the process
But come a bout of market volatility followed by BEARS blaring out their views and opinions on CNBC, the investor starts developing cold feet.
The long term view no longer seems true and temptation to exit is foremost in the heart.
This is the juncture that can puncture the goals and wealth creation potential of the investor.
No robot, no machine, no algorithm can act in such instances because one needs to have emotions to understand emotions.
A good advisor is one who steps in at this juncture and uses his foresight, knowledge and intent to pause the temptation before it becomes a decision.
A great advisor has high levels of sensivity; someone can feel the joy and pain for others; someone who is emotional and a little spiritual.
I can’t see a machine with such an heart.