Behavioral Finance in an emerging field. We’ve practically done away with viewing an investor as a purely rational being (sorry, Kant) and now look at investors as normal 
people driven by emotions. These emotions totally influence our behavior as it relates to investing (loss aversion, et al) and therefore completely impacts the performance of our portfolios.
Interesting article from Susan Weiner at Investment Writing this morning. She quotes extensively from a talk given recently by Gayle Buff, President of Buff Capital Management. The gist of the Buff’s lecture is that by understanding some of the finer points of behavioral finance, advisors can outservice clients in a down period like we’re in.
Specifically, Buff recommends 5 talking points for advisors to explore with their clients:
- Capacity to tolerate market volatility and economic risk
- Characteristic defensive posture in the face of anxiety and uncertainty
- Vulnerabilities, passions, strengths, weaknesses, and dreams
- Ability to process, integrate, and adapt to new information a new experience
- Commitment to working collaboratively and synergistically as one-half of the advisor–client relationship
Much of this seems pretty self-explanatory. Knowing why a client is compelled to make certain decisions helps advisors to service him/her better. As Buff said, “Instead of rushing in with facts”, advisors should listen to what their clients are saying and understand why they may be feeling a particular way. From there, an advisor can provide his perspective on a specific investment.
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