Morningstar Magazine - April/May 2018 - 33

When investing, investors may, without realizing,
evoke reactive thinking. For example, clients may
be so overwhelmed by investment options
they avoid taking any action to start investing
(we call this choice paralysis).5
As behavioral teachers, advisors help clients
recognize the conditions under which
their reactive thinking is activated and nudge them
toward making more deliberate decisions.
Research shows that helping people understand
and recognize their biases improves decisionmaking processes and that the effect persists at
least two months later.6
In short, the teaching aspect of behavioral
coaching means educating clients
about the psychology of investing-not just
financial concepts.
Behavioral Trainer: Change the Environment,
Not the Person

As a behavioral trainer, advisors can establish
an environment that supports their clients'
success. Here's a familiar example to show why
this matters.
Let's say John is a new client who says he
plans to set aside 10% of his aftertax paycheck to
a retirement account. In the first month, John
successfully invests 10% of his salary. However,
over the subsequent months, John begins to
fall short of his monthly goal-he either saves less
than 10% or fails to put any money away.
Despite John's good intention of saving more for
retirement, something prevents him from following
through. This is what behavioral scientists call the
intention-action gap, and it's one of the most
common behavioral challenges that investors face.
In fact, researchers estimate that only about half
the time do our intentions translate into action.7
Some advisors may interpret John's failure as a
personal shortcoming, a tendency to procrastinate

or to disregard future needs. Some might even
assume that John just isn't serious about saving
for retirement. However, behavioral research
suggests that the tendencies to procrastinate and
overvalue immediate rewards are inherent
in everyone; that's just the way our minds work.
Researchers have found that by changing
the environment-with nudges and a supporting
structure such as a trainer-we can keep clients
on track, despite the mind's quirks.
John's advisor could lecture him on the importance
of staying on track. But chances are, that won't
be helpful. Instead, the advisor as trainer could
help John change his environment to overcome his
behavioral obstacles. The advisor could help
John set up a voluntary payroll deduction that
automatically invests 10% of each paycheck.
This way, John does not have to make a conscious
effort to put money aside-it's done out of
sight and out of mind. Next, the advisor could help
John develop good investing habits such as
avoiding minute-by-minute market-watching and
instead doing quarterly check-ins.
Behavioral Counselor: Manage
Emotional Reactions

Market volatility is part and parcel of investing. Yet
during market fluctuations, some investors panic
and liquidate investments, causing them to
veer off course. This panic, in part, is derived from
their behavioral biases. During these emotional
periods, investors might believe that what has just
happened (a drop in the market) is going to
continue to happen in the future. This arises from
what is known as recency bias. In their minds,
market volatility turns into long-term capital loss.
During trying times like these, advisors playing the
role of behavioral counselor can have a large
impact by helping clients manage their emotions
and stay focused on long-term goals.
One way to help clients control their emotions
during market volatility is to intentionally introduce
friction into the advising process-such as

a prearranged three-day waiting period before
making major trades. This will allow clients
to take a step back from their emotions and bring
deliberative System 2 thinking to the forefront.
Another technique is to prepare clients for
future market corrections and the possibility that
they may be tempted to jump ship. Advisors
can have clients think through the scenario and
what they will feel and want to do. This is
akin to the process of inoculation in the medical
field. Mentally preparing clients for volatility is like
giving a vaccine against panic, before it arises.
Another exercise involves using a "precommitment
device," such as a personal commitment letter.
Advisors can ask new clients to put in writing their
life plans, goals, values, and for whom they
are investing-the root reasons of why clients are
investing. Then, during times of panic, advisors
can forward this letter to their clients, reminding
them why it is important to stay on track.
A Challenge Is an Opportunity in Disguise

The advisor ecosystem is undergoing major
changes, from new regulations to roboadvising to the unique expectations of millennials.
These changes will have an impact on an
advisor's bottom line, but they also provide an
opportunity for financial professionals to
showcase and build upon the value they bring
as behavioral coaches.
While the industry shifts, what remains unchanged
is the psychology of investing. One of the
greatest sources of value an advisor can provide
to clients is to help them navigate the emotional
ups and downs of investing. K
Ray Sin is a behavioral scientist, behavioral science, with
Morningstar.
Samantha Lamas is an associate behavioral researcher,
behavioral science, with Morningstar.
Michael Leung is an associate behavioral designer,
behavioral science, with Morningstar.

5 Iyengar, S. & Lepper, M. 2000. "When Choice Is Demotivating: Can One Desire Too Much of a Good Thing?" Journal of Personality and Social Psychology, Vol. 79, No. 6, pp. 995-1006.
6 Morewedge, C.K., Yoon, H., Scopelliti, I., Symborski, C.W., Korris, J.H., & Kassam, K.S. 2015. "Debiasing Decisions: Improved Decision Making With a Single Training Intervention." Policy Insights
from the Behavioral and Brain Sciences, Vol. 2, pp. 129-140.
7 Sheeran, P. 2011. "Intention-Behavior Relations: A Conceptual and Empirical Review." European Review of Social Psychology, Vol. 12, pp. 1-36.

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