Generally, people directly project their current emotional state into the future, forgetting they will probably feel different when the future becomes the present. Projection bias is the tendency of humans to make investment decision based on present desires, even if they override the long term goals.
For instance, given the current market conditions, many clients may believe that investing in fund categories like pharma funds and gold ETFs could yield attractive returns in future. This belief can make them shift majority of their corpus to these funds.
Often, MFDs receive calls from their clients who want to take impulsive decisions in the heat of the moment based on the current market scenario. This in turn has a major impact on their investments.
We asked a few MFDs how they deal with this projection bias.
Vinod Jain of Jain Investments, Mumbai
Many clients get carried away by minor market fluctuations and take future calls. It certainly impacts their finances and they may rue their decisions later.
In fact, a client recently sought my advice on shifting his entire corpus in IT and pharma funds given the current scenario. He believes that exposure to these two sectors will fetch him attractive returns over the years.
One of the best ways to deal with such clients it to keep educating them about the long-term benefits of maintaining asset allocation based on their risk appetite to tide over turbulent times like this. This prevents knee jerk reactions of clients.
Another approach is asking hypothetical question – basically, ‘what if’ questions. We develop plausible scenarios and discuss the possible consequences of these decisions.
Kiran Telang of Dhanayush Capital Advisors, Mumbai
Projection bias is where people believe that their tastes and preferences will remain same over the period of time. People often forget that changes will happen in the future and take their decisions based on present.
We keep telling our clients that they should not make investment decision based on current circumstances. We also try to visualize them future performance of their investment portfolio by using historic performance of various asset classes across market cycles.
Another thing we do to help clients overcome projection bias is to give them social proof. Social proof is a psychological phenomenon wherein people follow others and copy their actions. I tell how other clients have achieved their financial goals by staying invested in mutual funds for long term and avoiding market noise.
