How to Outsmart Your Brain and Boost Your Wealth: Part 2
Kevin Morgan
June 9, 2023
Recap:
In our first article we saw how you can use behavioural finance to understand yourself and your clients better, to set and achieve your financial goals, and to optimize your portfolio and risk management. In this article we will discuss how to communicate and negotiate effectively and how to cope with stress and uncertainty. We will also provide you with some tips and strategies to apply behavioural finance principles and techniques in practice.
A fourth way to use behavioural finance to your advantage is to communicate and negotiate effectively. This means expressing your ideas and interests clearly and persuasively, and reaching mutually beneficial agreements with others. By doing so, you can improve your relationships and outcomes with your clients, colleagues, or counterparts.
To communicate and negotiate effectively, you can use some of the following strategies:
Use financial literacy to enhance your credibility and confidence: Financial literacy is the personal knowledge of or confidence in applying basic financial concepts. Research has shown that having a higher financial literacy is associated with various financial behaviors and outcomes, such as planning for retirement, wealth accumulation, or stock market participation. Financial literacy can also help you communicate and negotiate effectively by enhancing your credibility and confidence. For example, you can use your financial literacy to demonstrate your expertise and authority on financial matters, or to support your arguments and proposals with relevant data and evidence. You can also use your financial literacy to increase your motivation and willingness to engage in negotiation, or to make more competitive first offers.
Use behavioural insights to understand yourself and others better: Behavioural insights are the findings and principles derived from behavioural finance and economics that explain how people think and behave in different situations. They can help you understand yourself and others better by revealing your own and others’ preferences, attitudes, biases, and emotions. For example, you can use behavioural insights to identify your own and others’ financial personality types, such as security, planning, carefree, spontaneous, status, or giving. You can also use behavioural insights to recognize your own and others’ behavioural biases, such as overconfidence, loss aversion, anchoring, confirmation bias, hindsight bias, or herd mentality. By understanding yourself and others better, you can tailor your communication and negotiation style to suit your audience and situation.
Use behavioural techniques to influence and persuade others: Behavioural techniques are the methods or tools that can influence or persuade others’ behaviour in a positive way. They can help you communicate and negotiate effectively by appealing to others’ emotions, logic, or social norms. For example, you can use behavioural techniques such as framing, anchoring, reciprocity, scarcity, or social proof to highlight the benefits or drawbacks of your options, to set a reference point for your expectations, to create a sense of obligation or gratitude, to increase the perceived value or urgency of your offer, or to leverage the power of peer pressure or testimonials.
A fifth way to use behavioural finance to your advantage is to cope with stress and uncertainty. This means managing your emotions and reactions when facing challenging or unpredictable situations. By doing so, you can improve your mental health and well-being.
To cope with stress and uncertainty, you can use some of the following strategies:
Use financial literacy to reduce your financial stress: Financial stress is the subjective experience of lacking financial resources to cope with demands. Research has shown that financial stress can have negative effects on mental health, such as depression, anxiety, insomnia, or loneliness. Financial literacy can help you reduce your financial stress by improving your knowledge, skills, attitudes, and behaviour's in managing your finances. For example, you can use your financial literacy to measure your financial self-awareness, identify your financial goals, create a budget and a savings plan, pay off your debts, or invest wisely. By doing so, you can increase your financial self-efficacy, persistence, satisfaction, and resilience.
Use behavioural insights to understand the sources and consequences of uncertainty: Uncertainty is the state of not knowing or being able to predict the outcome of a situation. Research has shown that uncertainty can have negative effects on mental health, such as fear, anger, frustration, or confusion. Behavioural insights can help you understand the sources and consequences of uncertainty by revealing how people perceive and process information in different situations. For example, you can use behavioural insights to recognize how uncertainty can trigger cognitive biases, such as overconfidence, confirmation bias, hindsight bias, or availability heuristic. You can also use behavioural insights to understand how uncertainty can affect your emotions, such as optimism, pessimism, regret, or disappointment.
Use behavioural techniques to cope with stress and uncertainty: Behavioural techniques are the methods or tools that can help you cope with stress and uncertainty by changing your thoughts or actions in a positive way. They can help you cope with stress and uncertainty by reducing their impact or increasing your coping resources. For example, you can use behavioural techniques such as mindfulness meditation, cognitive reframing, positive affirmations, or gratitude exercises to calm your mind and body, challenge your negative thoughts, boost your self-esteem, or appreciate what you have. You can also use behavioural techniques such as problem-solving skills, contingency planning, scenario analysis, or decision-making rules to tackle the problems or risks that cause stress and uncertainty.
Here are some tips and strategies to apply behavioural finance principles and techniques in practice, such as using tools, frameworks, or checklists:
Use a financial planner or advisor: A financial planner or advisor can help you apply behavioural finance principles and techniques in practice by providing you with objective and professional advice, guidance, and feedback. A financial planner or advisor can help you assess your financial situation, goals, preferences, and biases, and design a personalized and diversified portfolio that suits your needs and expectations. A financial planner or advisor can also help you monitor your portfolio performance and adjust your strategy as needed. A financial planner or advisor can also help you cope with stress and uncertainty by educating you about the market trends and risks, reassuring you about your long-term goals, and preventing you from making impulsive or emotional decisions.
Use a financial diary or journal: A financial diary or journal can help you apply behavioural finance principles and techniques in practice by helping you track and reflect on your financial behaviour and outcomes. A financial diary or journal can help you record your income, expenses, savings, investments, debts, and goals on a regular basis. A financial diary or journal can also help you record your thoughts, feelings, and motivations behind your financial decisions, as well as the consequences and feedback of those decisions. A financial diary or journal can help you identify your strengths and weaknesses in managing your finances, as well as the patterns and triggers of your behavioural biases. A financial diary or journal can also help you learn from your mistakes and successes, and plan for improvement.
Use a behavioural checklist: A behavioural checklist can help you apply behavioural finance principles and techniques in practice by helping you avoid or overcome common behavioural biases that affect your financial decision making. A behavioural checklist can help you check for potential errors or biases in your thinking or judgment before making a financial decision. A behavioural checklist can also help you review your decision process and outcome after making a financial decision. A behavioural checklist can include questions such as:
Have I defined my financial goal clearly and realistically?
Have I gathered enough relevant and reliable information to make an informed decision?
Have I considered multiple options and alternatives for achieving my goal?
Have I evaluated the pros and cons of each option objectively and comprehensively?
Have I consulted with others who have different perspectives or expertise on this matter?
Have I avoided being influenced by irrelevant factors such as emotions, social pressure, or media hype?
Have I made a decision that is consistent with my values and priorities?
Have I implemented my decision effectively and efficiently?
Have I monitored the results and feedback of my decision regularly and accurately?
Have I learned from the outcomes and feedback of my decision?
Summary
In this article, we have explored how to use behavioural finance to your advantage. Behavioural finance is the study of how psychological factors affect financial behaviour and outcomes. We have discussed some of the main concepts and principles of behavioural finance, such as behavioural biases, financial personality, and behavioural techniques. We have also provided some examples and strategies of how to apply behavioural finance principles and techniques in practice, such as using financial literacy, behavioural insights, and behavioural tools.
Using behavioural finance to your advantage can have many benefits for investors and advisors. It can help you understand yourself and others better, set and achieve your financial goals, optimize your portfolio and risk management, communicate and negotiate effectively, and cope with stress and uncertainty. By doing so, you can improve your financial performance and well-being.
However, using behavioural finance to your advantage also has some challenges. It requires awareness, education, and effort to overcome your own and others' behavioural biases. It also requires flexibility, adaptability, and creativity to deal with complex and dynamic financial situations. It also requires collaboration, communication, and trust to work with others who have different preferences and perspectives.
Therefore, we suggest some suggestions for future research or practice on this topic. For future research, we suggest exploring more behavioural finance concepts and applications in different contexts and domains. For example, how does behavioural finance apply to environmental, social, and governance (ESG)investing, financial inclusion, or financial education? We also suggest conducting more empirical studies and experiments to test the validity and effectiveness of behavioural finance principles and techniques. For example, how does using a financial planner or advisor affect financial behaviour and outcomes? How does using a financial diary or journal affect financial self-awareness and self-regulation? How does using a behavioural checklist affect financial decision making and learning?
For future practice, we suggest adopting a behavioural finance mindset and approach in your financial activities. For example, you can use a financial planner or advisor to help you apply behavioural finance principles and techniques in practice. You can also use a financial diary or journal to track and reflect on your financial behaviour and outcomes. You can also use a behavioural checklist to avoid or overcome common behavioural biases in your financial decision making. By doing so, you can use behavioural finance to your advantage.
We hope that this article has inspired you to learn more about behavioural finance and how it can help you improve your financial behaviour and outcomes. We also hope that this article has provided you with some useful tips and strategies to apply behavioural finance principles and techniques in practice. We wish you all the best in your financial journey.
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