How to counter cognitive biases and get clients to say ‘yes’

By Joe Templin

Now that the Certified Financial Planner exam has added a component focused on behavioral finance, it might make sense to cover some relevant concepts as to how the mind effects money and feelings impact finance.

The most important thing to remember is that we all live in a world of our own creation, because perception is reality when it comes to an individual’s belief system. We’ve all had that time in our lives where we did not get the client to take action because they have underlying belief systems that we did not uncover until too late.

Examples include the client who struggled to work while paying for college so they expect their kids to pay their own way too, or the client who lost a child just after birth and whose claim was denied, so they always carry that pain with them and hate insurance because of it. Every emotional experience contributes to the mental framework, and this applies to we professionals too. How many insurance agents do this because of a tragic loss? That is my story and the reason I am writing this article.

Cognitive biases are a good chunk of the exam material in Behavioral Finance, and every person we encounter has many of them. Here are some examples and how to deal with them in a client.

Frequency illusion or Baader-Meinhof Phenomenon. Once you buy a particular car, you notice it everywhere. Your Reticular Activation System is now programmed to notice it.

Application: Ask your client to look for your ideal client and they will actually find them for you, because they finally notice these people even though they’ve known them all along.

Clustering illusion, or small sample size. Seeing a trend from a very short run, like the clients in the late 1990s who thought the Dow would keep returning 20%+ forever after it did so for the only four-year period in history.

Application: Talk about bubbles such as real estate during 2004-2007, the dot.com era, bitcoin and tulips to help them see the bigger picture.

Semmelweis effect. A rejection of new information that doesn’t align with existing beliefs.

Application: Talk about a vehicle that allows after-tax contributions with no earnings cap that provides tax-deferred growth just like a Roth IRA but with much higher contribution limits. Call it a “Section 7702 Plan” the first few times, then tell them that Section 7702 defines life insurance in the Internal Revenue Code. This will allow them to warm up to the idea of life insurance without the visceral reaction.

Restraint bias. The tendency of people to overstate their discipline when faced with temptation. This is one of the key reasons behind the “pay yourself first concept” of getting clients to set aside money for long-range goals such as retirement or college before it is allocated for “fun” things that the Crocodile Brain and the Mammalian Brain crave.

Application: Talk to them about when they go to an all-you-can-eat buffet, as this is the greatest test and example of our inability to control ourselves. Directly tie this to how the subconscious is powerful and pleasure seeking, directly at odds with the whole idea of insurance and investing for the future. Maybe discuss the infamous Marshmallow Test, in which children were given a marshmallow and told they would get a second marshmallow if they were willing to wait a few minutes before eating the first one.

Neglect of probability effect. When people are uncertain, they tend to completely ignore the odds of something happening. The roughly three out of four people turning 65 who will need long term assistance (best funded with long-term-care insurance as we are well aware) and who are radically under-protected is a tremendous example of this, as is the fact that roughly one-half of the people under 35 will have a six-month disability yet the vast majority hold no individual disability insurance.

Application: Have a coin with you and bet them a dime against a dollar on the outcome (heads) and do it a bunch of times until they understand in their gut that not insuring is a losing proposition.

Framing effect. Where two options are directly compared and contrasted.

Application: instead of the either/or dichotomy (seen very often with term versus permanent insurance arguments), change the dynamic and discuss the strengths and weaknesses of each. Then introduce a blended option that has some of the strengths (and weaknesses) of each and they will gravitate towards Option B (your blend).

Effort justification (exhibited in the IKEA effect): Where people believe an outcome more if they are involved in the process.

Application: Having your staff (or agents if you are a manager) help determine the goals for the year gets emotional buy-in, the same way that the client adding up the costs at death makes these numbers “more real.” Involve them in the crafting and they believe it more.

These are just a few of the cognitive biases you might see on the CFP exam but also will see in real life with clients. Recognizing these biases and having strategies to neutralize them or use them for the clients’ benefit is a reasonable and rational approach to helping them reach their goals. It is not manipulation nor mis-applied Jedi Mind Tricks, but an understanding of how we are all wired and understanding the ethics to use it to help clients make the clearest decisions for their future.

Joe Templin, MCEC, CEC, CAP, CLU, ChFC, has written hundreds of review exams for the CFP exam, which he passed in 2001. He is the author of Every Day Excellence and host of The Human Kaizen podcast. He may be contacted at [email protected].

Joe Templin, MCEC, CEC, CLU, ChFC, CAP, is the author of Every Day Excellence and creator of the Financial Services Daily Drip-Every Day Excellence training email, https://www.salesactivitymanagement.com/everyday-excellence/. He is NAIFA New York State membership chair. He may be contacted at [email protected].