No One is Rational When it Comes to Money

On some level, most people know there is a need to manage their money better, yet they don’t put in the work needed.

It may help to remember that most money behavior is complex. Hack that complexity and you can change your mindset – and ultimately your destiny. How? Learn about your?money behavior. You can know it, master it and leverage it.

Tough questions, liberating answers

To understand people's relationship with money and gain money clarity, we need to understand who we are. Every decision we make is filtered through our environment, experiences, values and education. We need to ask ourselves how to have these life influencers and life messages inform our everyday decisions, especially as they pertain to money.

Addressing these questions can be confrontational and challenging: How did your family talk about money? (Or did they at all?) How has or hasn't money shaped your life? How have significant life experiences informed your attitudes about money?

Finding the answers around innate?money behavior?questions can be liberating and will undoubtedly put you on the right path to understanding the decisions you make (and not just about money).

Money and behavior, so what?

Without understanding inherent behavior and the bias and emotions that drive decision-making, we can never be prepared for the outcomes of our decisions. At best, we will make good decisions and protect and increase our wealth. At worst, we will not.

A vital part of the financial planning process should always be for the advisor to discover clients' life influencers.

Again, real-world financial decisions are complex. And going with your gut is not the solution, especially once you know such gut decisions are only correct 28 percent of the time.

Generally, investors look to advisors to inform their decisions. But without a mutual understanding of behaviors, how can the advisor know which clients want direction and information so they can make their own decisions and which clients need hand-holding? Not to mention those who need more focused investment counseling – so they can invest wisely to achieve life goals.

The role of behavioral science in decision-making is a real thing. The financial services industry is slowly adopting its application. Behavioral insights reveal?bias and the extent to which biases affect decision-making. They uncover emotions, risk propensity, (predictive) spending/saving patterns, and clients' potential mood as financial markets shift.

Understanding people – your clients and yourself – better to inform decisions puts both the advisor and client on safer footing in terms of advising and building mutual trust. And, hopefully, wealth.

Integrate the behavior edge

The?application?of this behavior-centric approach to advisor-client relationships is new-ish. The market now offers validated, scientific profiling systems to identify decision-making, revealing how individuals react under pressure. Such information can easily be delivered to the advisor in real-time at their fingertips.

Building a trusting and trusted culture based on financial behavior – in order to help clients make better money decisions – is no longer a nice-to-have feature. And it need not be stand-alone, as it can be integrated into existing platforms and systems so you and your clients can keep moving, just better.

Thus, putting in the time and work necessary to bring a rational, informed approach to money management and money decisions is simpler than many imagine. So much so that it's becoming a competitive edge.