When I first launched “Masters in Business” in 2014, I spent a lot of time begging (begging!) guests to come on. So when Brendan reached out and asked to come on to discuss behavioral finance and financial planning, I felt like paying it forward was the right way to go.
We discussed my first job in finance on a trading desk led to my accidental discovery of Gilovich’s book How We Know What Isn’t So became my gateway drug to Behavioral Finance.
We discuss Overconfidence, Anchoring, and Dunning-Kreuger and how they are applicable to the business of managing assets and planning for people’s financial lives.
Here is a smaple:
Q: What happens when clients says “Hey, I saw this guy on TV who said markets probably gonna drop 50% or the economy’s gonna drop over the over the next year?”
A: I love when a client says “So and so on TV said X” – my answer is “Great, what’s his track record?” What do you mean? Well, he’s making an economic forecast, before you pay attention to something that seems kind of radical, what’s their track record in the past? How good is he predicting these sort of things?
That’s very different than someone saying to me “I’ve been following this guy for years and he’s put up a great track record, and he’s got a wonderful process and I like the way he thinks about these things.” That’s a very different conversation than “Hey this schmuck on TV said the world is going to hell…”
It was a fun conversation, and if you want to hear more of me answering questions instead of asking them, then settle in for 90 minutes of babbling insights.
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Note: This should come with an NSFW disclaimer; When I know it’s not for broadcast over the air (no FCC listening) I kinda cut loose…
From Wired Planning:
Episode Summary
As behavioral finance has moved into the mainstream and started taking financial services by storm, one thing has become clear.
It’s great to know there’s a way to explain a client’s sub-optimal behavior.
But, it’s an entirely different challenge to know what to do about it.
In other words, behavioral finance has done a great job of providing advisors with a list of diagnoses. There are over 20+ biases to pick from. But, we need less diagnosis and more prescription.
More help in knowing what to do when working with clients to help them overcome and minimize their biases on the path to better financial behavior.
Is it helpful to know that the 60-year old pre-retiree is holding onto a highly-concentrated stock position because of overconfidence bias?
Certainly.
But, it’s even better to know what to do about it.
Barry Ritholtz has been on the cutting edge of behavioral finance in the industry AND he just so happens to run an advisory firm where they focus on applying behavioral finance principles to improve client behavior, and ultimately, client outcomes.
In this episode, he peels back the curtain to share the specific ways that Ritholtz Wealth Management focuses on improving client behavior.
Things You’ll Learn
- The book that completely reshaped the way Barry viewed behavior and money
- Why they steer clear of market forecasts and focus instead on probabilities
- How the firm gets their clients focused more on the process and less on the markets
- A question to ask your clients who believe everything they hear on TV from market pundits
- The power of setting expectations in the midst of uncertainty (and how to do it effectively)
- How the firm uses its newsletter to improve financial behavior
- How they minimize bias by naming their portfolios
- The “Milestone Rewards” program that offers a fee discount to reward client behavior
Podcast links
The Human Side of Money Ep. 79: Behavioral Finance Principles That Actually Improve Financial Behavior with Barry Ritholtz
