Understanding Cognitive Bias

Understanding Cognitive Bias

By Matt Oechsli | @mattoechsli

Recently I was having a conversation with a long-term friend. He knows that I am a healthy eater and that I eat little red meat, which is precisely why he brought up the subject. Looking to needle me a bit, he referred to my eating viewpoints as “misinformation by my so-called experts.” My experts?!?

My friend has no great knowledge of proper eating (90% of what he eats is highly-processed), but that doesn’t stop him from grandstanding on the topic. Why? Because of a cognitive bias labeled the Dunning-Kruger Effect. It asserts that a person with a low level of knowledge on a subject tends to assess their knowledge as greater than it actually is. Conversely, experts on a subject often underestimate their knowledge. 

An easy example of the Dunning-Kruger Effect in your business is the client who has a low level of investment knowledge, yet has a lot of opinions on how you should manage their money. They’re not disrespecting your expertise, it’s just a form of bias. When confronting this issue, understand it’s not personal, and work to educate them in small doses.

Our goal is not to turn you from advisor to psychologist, but we do find it helpful to understand biases and the effects they have on your clients and prospects. There are multiple forms of cognitive biases.

For instance, let’s look at the Optimism Bias, which is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. You may notice this when talking with clients about risk tolerance and performance expectations. 

So, how should you handle overly optimistic expectations? Without directly telling clients or prospects they are suffering from Optimism Bias, you can still make them aware of this tendency. Again, it’s not personal, you’re simply pointing out human nature. We tend to expect positive outcomes in our own lives and think negative outcomes happen primarily to other people. 

Let’s move on to Anchoring Bias. Everyone knows about the importance of making a good first impression, but not everyone knows why. It’s because we all are susceptible to what is called an Anchoring Bias. This is where we rely too heavily on the first piece of information offered. So whether it’s your appearance at a social event, your people skills, or the professionalism of your office, it’s important to anchor a positive bias in the minds of your prospective clients first. Negotiators in sales understand this which is why they deliberately start with a number that is either too high or too low as that number will anchor subsequent meetings.

Another bias you might have experienced is the Self-Serving Bias. Have you ever had a bad experience with someone you thought was a good prospect? Somewhere things went south. You didn’t get the business and your initial reaction was some version of “This guy’s a jerk!” It was them, not you, as to why the deal didn’t go through. 

Yet, subconsciously you refined your presentation approach, and the next prospect meeting went very well resulting in a new client. Now your impression is “This prospect was really sharp,” even though you in fact refined your presentation. The next time when things don’t go your way, remember that we have a tendency to look outward, when we should really look inward.

This leads us to Short-Term Bias. Essentially, whether it’s our health or our finances, we tend to live in the world of the immediate. Which is why most people under save for retirement, and many affluent clients procrastinate on estate planning. 

There is a great study that illustrates the insidious nature of short-term thinking. One group was asked if they’d prefer to receive a gift of $150 now, or $180 in 30 days. Most chose the $150 now. The other group was asked if they preferred receiving a gift of $150 in a year or $180 in 13 months? In this case, with a longer timeline presented, $180 was the winner. Yet another cognitive bias that helps us understand ourselves and our clients. 

Now if you didn’t succumb to that Self-Serving Bias (I already know all of this), we hope you found this gave you an idea or two, or at the very least you found it interesting.

There are a lot of cognitive biases – Wikipedia’s list has close to 200 entries. The idea is to recognize those that affect you and mitigate their negative impacts.

If you liked this article, you’ll love the Oechsli Learning Center™ – the industry’s best online courses for financial advisors.

Imagine how great it would feel to start every day confident that you’re performing like an elite advisor.

  • You ask a social contact to discuss business… and they agree
  • You hold a team meeting… and everyone leaves with clarity
  • You message a prospect on LinkedIn… and they actually respond
  • You hold a review meeting… and your client understands your real value
  • You have a social lunch with a client… and uncover an opportunity

The Oechsli Learning Center is the framework for an elite practice – based on research of over 2,000 advisors.