CHICAGO – Charts, plans and formulas can tell clients the right thing to do, but they will not get clients to do the right thing, according to Morgan Housel of The Collaborative Fund.
“Behavior is hard to teach,” said Housel, who is scheduled to discuss the issue today. “You can’t sum up behavior with formulas to memorize or spreadsheet models to follow. Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.”
This is why Housel said that investing is not the study of finance, but the study of how people behave with money, which is what he will be presenting at the 2019 Morningstar Investment Conference.
Called “The Psychology of Money,” Housel’s presentation will focus on how people think about risk and how investors make decisions.
Housel said, “The finance industry talks too much about what to do, and not enough about what happens in your head when you try to do it.”
Ideally, this will make financial services professionals more aware of what investors are thinking and enable them to help investors make better financial decisions, he added.
To illustrate his point, Housel leans to academia.
Famed economist Harry Markowitz won the Nobel Prize in economics for creating formulas to determine how much of a portfolio should be in stocks and how much should be in bonds. Despite his work, Markowitz proclaimed to the Wall Street Journal that when he invests, it’s purely emotional.
“I visualized my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities,” Markowitz has said.
So, even academics may be technically right, but don’t act according to their own findings in the real world.
There’s a simple explanation for this, Housel said.
“What works on a spreadsheet and what works at the kitchen table are 10 miles apart,” he said.
In his presentation, Housel will be using more real-life scenarios to help the audience understand how humility, adaptability, long-time horizons and skepticism of popularity around money are essential to good financial behaviors.
Housel added, “Be prepared to roll with the punches.”
AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.