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Are humans rational when it comes to investing?

When it comes to investing, people can be rational, but it is a qualifier that is certainly different from one human to another.



Rational decisions differ from the perspective of advisors and investors when it comes to investing.

Are financial advisors making a mistake in trying to steer investors away from making what seems to be a bad idea? Take for instance the client who calls you today and wants out of the market entirely because they’re not comfortable. Generally, we would point out the wisdom of staying invested, historical returns, unpredictability of market timing and a bunch of conventional wisdom we’ve gained over the years. After all, your collective wisdom is a big reason why a client hires you, right? But, are we missing something?

In a discussion with a large number of significant investors, something rather startling was pointed out to me. It comes from the cognitive-behavioral school of consulting and represents a large portion of the poor perception of advisors by the significant investors.

Humans are very rational when it comes to investing. But rational is a qualifier that is certainly different from one human to the next. The lead investor in the discussion maintained that “All behavior is purposeful.” Sometimes what is irrational to an advisor is very rational when viewed through the eyes of the one doing the behavior. Perhaps the trick is to first understand how the behavior is rational for the person doing it, and then to intervene in a manner they find rational.” This, he said is where advisors miss the boat.

Many advisors try to get clients to see things as they do rather than to simply provide useful information they can use, or not use, on their journey. The former is adversarial, the latter collaborative.

It seems a number of behavioral scientists have written about this adversary vs collaborator, such as Gary Applegate, “Happiness is Your Choice,” and Sherry Cormier, Paula Nurius, and Cynthia Osborn, “Interviewing and Change Strategies for Helpers.”

We tend to focus on the client’s financial needs, but clients have psychological needs as well, which may be much more important to them. If we are to take a client-centered approach, shouldn’t we be looking at the client’s world through their eyes?


Aside from financial needs, clients also have psychological needs that should be considered when investing. (Source)

We ask clients for referrals, but what does a referral mean if the referring person does not know the needs, mind, psychology and objectives of the referee?

The lead investor in this discussion said, “Both clients and advisors arrive at the first meeting with a set of expectations for the roles they and the other person will be fulfilling. Perhaps the advisor’s job (after hearing why the client is there) is to facilitate the client expressing their expectations, to share the advisor’s expectations, to provide a realistic picture of process/outcomes, and to work with the client to resolve any differences in role expectations or relationship demands. Thus, the advisor is working to form a working alliance with the client to meet the needs of the client rather than working on “selling” the client on the advisor’s investing philosophy.” Agreement prevailed.

The result of this discussion was that investor consensus said a truly superior financial advisor can see the world through the eyes of the client without judging the client. By working from this shared worldview the advisor will be more effective.

Like each of us, our clients have a reason for everything they do. Shouldn’t we take the time to really get to know them, their likes and dislikes, and what makes them tick? Like us, investors believe they are doing the things that are best for them. Just because we’ve been in this business more than a few years, why do we have the right to judge our client’s actions or decisions without first actually understanding them?

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

John is widely regarded as a top legal expert on fiduciary responsibility relating to the investment management profession. A former Banker, teacher and adjunct professor at colleges, including at Wharton, John started his securities representation in 1983, before joining EF Hutton in 1987 where he served as the director of Portfolio Management Programs and General Counsel of the Consulting Group. Later, he started his own law firm, specializing in employee benefit, securities law. In 1995, he co-founded The Lockwood Group of companies, where he served as Chief General Counsel and Corporate Secretary, as well as President of Lockwood Financial Services, Inc. Upon retiring from Lockwood in 2002, John devoted his efforts to Howling Wolf Enterprises, a training company and a publisher of books and articles on Investment and Financial issues as well as fiction. In 2011 with partners known in the Investment management business, he founded The Learning Network, whose mission is to improve Financial Literacy globally for financial professionals and investors. He has authored 14 books on investment management. His current mission is The Ethical Treatment of Somebody Else’s Money, found at In 2010 the Money Management Institute designated him an "architect of the managed solutions industry" awarding him their Pioneer award for Lifetime Achievement in Wealth Management.