The Drive of Behavior on Financial Decisions

Many people ask: why is discovering natural behavior important to understanding how financial decisions are made?

As outlined in my last blog the natural behavior is the core of who you are. It is the instinctive behavior that you predictably revert to under pressure. This is key to financial decision-making because money and relationships very often put you under pressure.

You also need to appreciate that financial risks are not only about the market risks, but are also strongly impacted by the behavior of both investors and advisors. For instance, the failure of an advisor and client to communicate properly can lead to financial risk. Or, the quality of financial decisions made by a couple or family will be directly related to the nature of their relationship. To the extent there is dysfunction in the relationship there will then be poor financial decisions made. The natural tendency is for people to work round each other and not tell each other important information, or what my friend and industry thought leader Rick Kahler calls "financial infidelity". Understanding each other's behavioral differences and learning how to adapt your communication will lead to better financial decisions.

The following are also important reasons as to why we all need to understand our own behavior and that of others, whether you are an advisor or investor:

1. Behavior influences how you see the world, yourself and how you experience life. This then shapes the financial decisions you make. Some people are very ambitious and results driven and therefore money will be more about achieving goals, whereas others are much more driven by stability and balanced life, so security and lifestyle for their family may be important.

2. In many ways your relationship with money is a function of your relationship with yourself. What we have seen is that those people who are in touch with their natural talents, passions and values (which are all behaviorally founded) will be able to set goals with greater clarity. By having greater clarity of who you are at the core, you will naturally gain greater money clarity. Making financial decisions will be easier, and have a more positive impact on your life. You will be able to set course with commitment. When there is a lack of clarity it is very easy to sabotage yourself with emotional or irrational decisions. Sadly, if money is the primary driver of your decisions then you are setting yourself up for failure and disappointment at some stage.