Some advisers are tricky souls: they ask clients cleverly loaded questions to reveal biases in their analysis.
They aren’t trying to make them look blinkered or ignorant – far from it. Rather, it’s all part of the game of serving their best interests.
Take this question, which you might ask a college basketball fan. How many times does the team that’s trailing at halftime come back and win? We’ll provide the answer straight away: 23%. Offer the question and you’ll almost always hear a greater probability. Indeed, most people think the underdogs stage a comeback at least twice as often, despite the implied illogic: after all, if a team was bested in the first half, the second half should reveal a similar pattern. So what’s at the root of this bias?
It’s simple enough: unfounded optimism. Rooting for the best is OK if you’re following your favorite team, as it makes things fun and causes no harm (unless you’ve splashed out on a mad wager). When it comes to the performance of your estate plan or stock portfolio, being the bright-eyed Candide is a danger beyond measure. Rational analysis is the order of the day – not empty wishes.
Here’s a clever one: your favorite uncle gives you $10,000. You decide to invest his largesse on 100 shares each of two companies, priced at $50/share. Over the first month, one group of shares loses 50% of its value, while the other gains 50%. What should you do?
Most respondents would say sell the winner, record a nice gain and feel just swell. If you like capital gains taxes (remember, the $10g was a gift), that’s the correct answer. Sell the loser (which is now likely fairly valued, anyway) and you recognize a tax-reducing loss. Personal biases, like the stock market itself, are tricky little devils.
For more information, please read:
6 questions that can reveal clients’ behavioral biases | OnWallStreet