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By David RichmanNational Director, Eaton Vance Advisor Institute

Perhaps you recently had a prospect blame his reason for staying hunkered down in cash on the absolute disconnect between "the market" and the alarming spike in COVID-19 cases and deaths. Often this same person sold out at the bottom in late March and has been continuing to believe "the market" recovery isn't real. That somehow "the market" has it all wrong.

There are at least four core issues underlying a reluctance to listen to an alternative view — two behavioral and two cerebral. Your capacity to relate to these potential phenomena will greatly increase the probability of helping your next prospective client who is also convinced of the disconnect. In this post, we will consider the potential behavioral issues and will address the two cerebral challenges in a subsequent post.

Consider our prospect who unfortunately didn't have you by his side counseling him to hold on in March. Obviously, he regrets this decision. Most days, as "the market" has continued to climb the proverbial wall of worry his regret becomes all the more painful. It is quite likely your prospect is a victim of "regret aversion" and "confirmation bias."

  • Regret aversion. Behavioral finance experts have proven how many of us feel the need to avoid regret. Even at great cost. "Regret aversion" can be a powerful force, anchoring people to suboptimal strategies simply because their subconscious refuses to confront their true regret. The prospect might keep rationalizing: "You'll see. I will be vindicated soon enough," literally cheering each day markets gap down and desperately trying to ignore when they rally.
  • Confirmation bias. Our prospect starts to make "the market" the enemy and anyone who is bullish is an enemy by association. Our prospect only seeks out opinions that confirm his bearish views and will not even listen to or read a counter view.

It is easy to see how these two behavioral biases can conspire to influence often self-defeating financial decision-making. How can you help your clients move forward? We would suggest following the 3 Dynamics of "Chasing Positivity:"

  • Communicating empathically. This means starting your conversations with an understanding of the other person's perspective: "Markets have so many cross currents and can be so difficult to assess."
  • Collaborating consciously. We use the word "consciously" to make certain that, in every conversation, you are being intentional about how you collaborate: "I wonder what might be our best course of action from here?"
  • Inspiring action. Your success in inspiring action is based upon how you phrase things with clients: "We don't need to be 'all right' or 'all wrong.'"

Bottom line: Behavioral biases tend to be deep-seated. Take your time: This is not simply a Band-Aid to rip off quickly.