The Advisor Is In
I started working on this blog on Friday, the 25th anniversary of the 9/11 terror attacks. I wanted and intended to commemorate that day to honor the victims and share the anger and sadness I still carry today. But I soon realized I wasn’t up for the task. My writing skills are not sufficient to do justice to such an impactful event.
In recalling 9/11, I revisited the launch of my career as an investment advisor and Certified Financial Planner® in 2000, and the many significant events that have impacted investors emotionally and financially over the past twenty-six years. As a former nuclear engineer with a master’s degree in financial planning, my assumption was that my job would mostly entail being technically correct and presenting logically sound advice to my clients. After 9/11, most clients were fearful, angry, confused, or some combination of those emotions. Other stressful events post 9/11 included The Great Financial Crisis, the Deepwater Horizon explosion, and the Fukushima meltdown. In each event, I tried to calm clients with reason. In most cases, I failed.
Eventually, I figured out that I was misapplying behavioral finance. This is a field of study that blends finance and psychology, with the key takeaway that humans aren’t rational. The common advice from armchair behaviorists is to learn to control and hopefully even eliminate your emotions when making important decisions. In short, eliminate the emotional system, leaving only the rational system. This was my error. It turns out that emotions are critical to decision making.
Consider two developments we’ve learned from the field of neuroscience. The Damasio study in 1994 compared decision-making in a simple card game between two groups of subjects. One group was healthy subjects. The other group consisted of patients with brain damage affecting the part of the brain that processes fear and other emotions, but who otherwise were fully functional. The healthy group showed physical signs of emotion (e.g., fear and stress) and were able to solve the game. The subjects who couldn’t produce emotions showed no physical signs of stress but were unable to solve the game. Their lack of emotion limited their logical decision-making abilities.
The human nervous system is more than just the brain. It includes your eyes, and it includes several large nerves, such as the vagus nerve. The vagus nerve is the largest and most complex of the twelve cranial nerves. It is the command center for the parasympathetic nervous system, and it is central to the gut-brain connection. Modern neuroscience has measured reactions in the parasympathetic system in microseconds, which means your feelings are orders of magnitude faster than your logical thoughts.
Putting all this together yields a better formula for decision making. To change your outcomes, first change your thoughts. And to change how you think, first change how you feel. This was the key to my evolution as an advisor. CFP® practitioners must have comprehensive knowledge, and being an advisor requires a plethora of skills. We need to master income taxes, estate law, portfolio theory, economics, and more. But the one skill I rely on most, and the most important, is that of an amateur psychologist.
The advisor is in.
Russ Wood