It’s widely accepted among financial professionals today that incorporating client psychology is how we distinguish ourselves from robot/AI advice. But what kind of “psychology” are we talking about? And is the goal to understand clients better and empower them, or is it to manipulate their behaviors?
A lot of financial professionals equate client psychology with Behavioral Finance. As the name suggests, this field applies principles of behavioral psychology to individuals making financial decisions and the resulting impact on financial markets.
But behaviorism is last century’s approach to psychology. It doesn’t give people agency to choose their own goals. It lets “experts” define the desired outcomes and then train their charges towards that end. It isn’t trauma-informed or inclusive of diverse perspectives.
In recent hearings the Department of Labor held, a law professor pointed out that financial professionals simply applying behavioral psychology without ethical constraints can “basically turn your entire industry of sales people into pick up artists. Essentially what they’re trying to do is use every psychological trick they can to manipulate people into trusting them quickly before they can be held accountable for what they do. And so, essentially, we have modern psychology. Enormous amount of study has gone into how to convince people to trust you, how to buy particular things, how to sell particular things.”1
A core concept of behavioral finance is “loss aversion,” which notes that people usually have more intense negative feelings about losses than positive feelings about gains of the same magnitude. Behavioral finance says this causes people to make “errors” with their finances when they make decisions based on their emotions instead of pure “rational” analysis.
But is that an “error”? To individual people, money is not just a number in a spreadsheet, but it represents the ability to provide yourself and your loved ones with desirable life experiences. If losing $100,000 means you lose your home, while gaining the same amount means you can buy a luxury automobile, then I would say it is entirely rational to choose the course that avoids catastrophe over the one that yields luxury. Your “emotional” loss aversion is helping you with multidimensional decision-making that spreadsheets don’t capture.
To actually help clients live their best lives, we need to catch up to 21st century psychological insights. For instance, we need to recognize that feeling safety and connection enables optimal functioning of the entire nervous system, including rational decision-making. Providing that secure base for a client should be the foundation of every financial plan.
That’s my view, at least. What do you think?
- Benjamin P. Edwards, William S. Boyd School of Law, University of Nevada, Las Vegas, Public Comment Hearing on Retirement Security Rule: Definition of an Investment Advice Fiduciary, Dec. 13, 2023. ↩︎
Curious Financial Counsel 
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