Emotions and biases affect every decision we make, including investment decisions. By recognizing the influence emotions have in the decision-making process, you can reduce their impact on the decisions you make for your clients, says Michael Falk, a consultant with the Focus Consulting Group Inc. in Long Grove, Ill.
Using a system to make decisions won’t get rid of your emotions or biases, says Falk, who spoke at a CFA Society event in Toronto last week. But it can slow the decision-making process enough to get you to think objectively about your options.
The choices you make for yourself or with clients can be clouded by influences as diverse as the weather and an argument with a significant other. Follow these tips to create a more objective decision-making process:
> Admit that it’s not easy
Be honest with yourself about how difficult it is to make investment decisions and advise clients.
“Admit that we’re not wired for this,” Falk says. “Our brains were designed for a fundamentally different time.”
Understanding that our brains are not wired for making difficult financial decisions will help you put the situation in perspective, Falk says. That knowledge can lead to seeking out other opinions before deciding on a course of action.
> Question your motives
Understanding why you are making a certain recommendation to a client, Falk says, will help you to see whether it is actually the best choice for that client.
For example, you might consistently recommend a certain strategy simply because that’s what you’ve been taught to do, he says. It is important to question that bias.
You also need to understand your client’s motives, Falk says. For instance, a client might have difficulty making a financial decision involving a recent inheritance because he or she connects that money to his or her relationship with the deceased.
> Create a process
Make a checklist or a questionnaire, Falk says, to go through before making a recommendation or an investment decision.
While your checklist can be customized, Falk recommends including these questions:
Have I completed my own assessment?
Have I recently heard a strongly positive or negative opinion about this strategy? Have I sought out contrarian opinions?
“It’s almost a mental inoculation,” Falk says, “to try to force yourself to think differently about the quality of the decision.”
Starting a conversation with someone who completely disagrees with you, Falk says, is a particularly important step in the decision-making process. Speaking with a contrarian can help to strengthen your own opinion or it can reveal possible flaws in your thinking.
> Keep a journal
Avoid making the same mistakes over and over again, Falk says, by keeping a daily record of your activities and decisions.
Before making an investment decision for yourself or for a client, write down the date; what you want to buy or sell; your justification for making that call; your feeling at the time of the decision; and your level of confidence that it is the right move.
Review the journal to identify “blind spots” in your decision-making process, he says. A blind spot is a gap in your knowledge, or issues that tend to cause you to make a bad decision. For example, you might not understand the technology sector well, or always make a rash decision when angry.
Once you become aware of these blind spots, you can watch out for them and avoid letting them influence your decisions.