Behavioral finance tells us how our biases can influence investment behavior. Recognizing the kinds of biases held by your female clients may help you guide them toward more sound financial decisions.
Everyone has biases: it is part of being human. And cognitive biases can work as mental shortcuts that help us understand the world and quickly make decisions. The downside is that these biases can cause us to take actions that are not always accurate and useful.
Before we consider the kinds of biases your female clients may exhibit, it’s important to know that women, in general, are better savers. Research has shown that women tend to save a higher percentage of their incomes. They also tend to evaluate their options before making decisions, which reduces the risk of knee-jerk reactions like selling their investments when markets experience short-term declines.
A first step is to help them identify and understand some of the common cognitive and emotional biases they may exhibit. This opens the door to finding strategies for successfully managing those biases and mitigating the effects. Here are a few common biases:
The way a topic is presented can make a difference in whether or not a client makes a meaningful choice.1 This is referred to as framing.
As an example, framing can be a useful technique when having the annuity conversation. Instead of asking a client if she would like to talk about how an annuity can fit into her plan, ask if she’d like to know about a financial product that can provide guaranteed lifetime income.
If you have a client who is reluctant to invest the way she needs to in order to grow her retirement income, try asking the question, “Would knowing you have protected income that will cover basic expenses make you more comfortable investing some of your money in growth for inflation protection?” This can lead her to use mental accounting to separate her basic expense account from her discretionary growth account and give her the confidence to invest.
Educating your female clients about behavioral finance can give them a tactical advantage: the ability to recognize when their biases could potentially limit their financial successes and make decisions that potentially lead to better results. So, reach out to your female clients to have the conversation about biases and empower them to reach their retirement goals. They will appreciate the information, and it will be easier to address once a bias does show up.
1Thaler, Richard & Sustein, Cass. (2021). Nudge: The Final Edition. London: Penguin Books.
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