Have you ever gone shopping on an empty stomach, impulsively bought plenty of junk food and later after dinner, wondered why you bought all of it? If the answer is yes, then you know what it is to fall prey of what behavioural scientists call “projection bias”.
Generally, people directly project their current emotional state into the future, forgetting they will probably feel different when the future becomes the present.
This indicates that humans have a tendency to make investment decisions based on present desires, even if they override the long-term goals. Very often, advisors receive calls from their clients that suffer from projection bias and take impulsive decisions in the moment based on the current market scenario. This in turn has a major impact on their investments.
Advisors commonly assess the client’s willingness and capacity to bear risk while advising. This task is difficult for many reasons. One reason is that a client’s willingness to take risk is influenced by recent market performance.
In fact, a survey conducted by four behavioural finance experts, Grable, Lytton, O’Neill, Joo, and Klock revealed that price activity in the stock market over the previous week had a positive correlation with the risk assessment score of investors.
We asked a few financial advisors how they deal with such projection bias from their clients’ end. Read on to know what they said.
Vinod Jain of Jain Investments believes a building a strong investment strategy amongst clients helps them to handle market volatility. He said, “Often, clients get carried away with minor market fluctuations and take future calls on its basis. It certainly impacts their finances and they may rue their decisions later. To avoid all this, we keep continuously keep educating them about the long-term benefits of staying invested that gives them the confidence in turbulent times.”
Shifali Satsangee of Funds Ve’daa uses scenario planning as a strategic tool to deal with such clients. She said, “During initial engagements with the client, we explain to them about the omnipresent behavioural biases (greed and fear) they may encounter with market movements and its impact on their portfolios. Such education prevents knee jerk reactions”
She added, “In a handful of cases where they still seemed to be affected by the noise and the news, we ask them logical ‘what if’ questions. We develop plausible scenarios and discuss the implications which may occur due to that particular decision. It is a very effective tool to do away with myopic behavioural biases and visions.”