The Neuroscience Of Risk Management

By Panos Leledakis

It’s human nature to want to avoid hearing about potential impacts of risks. Clients are no different – when sharing how factors such as daily smoking or hereditary diseases could affect their future finances, it’s not uncommon to hear responses that border on denial.

When addressing potential risks with clients to help them proactively manage, it’s helpful to understand the science behind risk management. The idea of life insurance and product is simple, but fear of death is complicated. Our brain is designed to try to protect us from pain, because fear is pain.

By learning how to approach these delicate topics with clients, you’ll be able to form a more holistic risk assessment plan that allows them to prepare for the inevitable unexpected obstacles of life.

What’s stopping clients from accepting risks?

The human brain has six functions, three of which are defense mechanisms that prevent people from accepting potential risks and moving to protect their future finances. All six are worth keeping in mind when approaching the topic of risk management with clients.

1. Confirmation Bias
This is the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories. If a prospect harbors a negative bias surrounding the benefits of a financial advisor, it will be difficult for that prospect to find value in the financial advice we provide. We must find innovative ways to work around a prospect’s confirmation bias for them to accept our message.

2. Optimistic Bias
Many people harbor a version of optimistic bias. The brain produces over-optimistic assumptions, such as “Nothing like that will ever happen to me,” because it’s trying to protect the body from pain, and in this case fear. These mental blinders prevent many people from accepting the possibility of risks, missing the opportunity to prepare for them.

According to the Association for Safe International Road travel, about 1.35 million people die in road crashes each year. That’s a statistic recognized by society (there’s a reason we’re required to have car insurance), but on an individual level, optimistic bias blocks many of us from believing we could be one of those 1.35 million.

3. Fear Tolerance Level
Everyone knows the typical responses to fear: fight, flight or freeze. But we don’t typically align those responses to how clients interact with us. Dealing with finances can be intimidating and scary for many. If we aren’t careful when addressing risks with our clients, we can send them into a fear response.

The subsequent “fight, flight or freeze” reaction could prevent them from listening to our sound financial advice, and they may be unable to make a decision. While fear can be a motivator to buy insurance, it is wise to refrain from relying too heavily on it in your consultation strategy.

4. Homeostasis
Humans tend to be creatures of habit. When you bring up something new like life insurance, your clients might think, “I’ve made it all this time without it; why do I need it now?”

Homeostasis is the same function that keeps our temperature and heart rate steady, so naturally we tend to be averse to change. In response to a suggested change, the hormones released in the brain are similar to ones that ensure our survival. Plus, the idea of adding a financial burden to maintain protection they have not yet needed won’t automatically sound appealing.

5. Instant Gratification
In this digital age of instant messaging and streaming, we’ve gotten used to the idea of receiving desired outcomes immediately. As a result, activities like preparing for the future can end up on the backburner. To prevent this, we need to enrich our arguments to persuade clients that preparing for risk is always beneficial.

For example, a young couple might view maintaining life insurance policies as a waste of money. In those circumstances, it’s important to remind them that acquiring life insurance earlier in life could protect them in the face of unforeseen tragedies – especially if either of them is employed in a higher-risk job that makes obtaining insurance more difficult, such as aircraft pilots, ranchers or fishermen. There are many arguments to convince people of the vast benefits from insurance, even if the claim never comes.

6. Different Ways to Receive Information
People have certain ways they receive information. Financial advisors need to be able to identify and respect the way their clients are processing information. If you’re presenting information in a way that doesn’t connect with your client, they are less likely to understand and act on the guidance you are providing.

Listen to cues and feedback your clients are giving you to make sure the information you are sharing is getting across. If you want to ask a client to decide and close a sale within a 45-minute meeting window, you need to make sure you’re presenting information in a way that respects the logical and emotional needs of their brain.

All these functions work interchangeably. There is a chain reaction between each of them that reinforces one another once set of, which makes the tasks of convincing clients to incorporate risk in their financial planning a difficult one.

Engage Clients

How do you get your client to accept and address potential risks?

To truly engage clients on this difficult topic, shape their financial plans around the positives that matter most to them, not around the negatives of what may or may not happen. This approach helps to alleviate any fear the client may harbor. Plus, by shifting their focus to protecting what they deem most valuable, it becomes easier to align with their optimistic and confirmation biases.

To identify what’s most important to your clients, consider incorporating a risk-assessment software into your practice. Software like this, which evaluates major risks in your clients’ lives, allows you to bypass defense mechanisms and present information in a digestible and easy-to-understand medium.

Conversations around preparing for the worst and acknowledging risks are not the easiest to have – but they are necessary to ensure our clients are well taken care of. By understanding each of your clients’ defense mechanisms and the ways in which they process information, you’ll be able to effectively address and engage them in risk management discussions, setting them up for a better future.

About the Author
Panos Leledakis, LUTCF, IRMA, BRMA, is the president and CEO of IFAAcademy and a 3-year TOT MDRT member. Panos has invented two innovative software for insurance need analysis by implementing the science of risk management, artificial intelligence and extensive neuroscience research on risk perception and decision-making. The software has received many innovation awards, including from MIT University (MIT Enterprise Forum), the Chamber of industrialists in Cyprus, Europe start-up awards, and the global “Get in the ring” contest. In 2020 also he received the prestigious global award “Top 25 InsurTech CEOs of 2020” from Technology Innovators Media.