One Scoop or Two?

07 February 2024
4 min read

Anchoring is a heuristic—a mental “shortcut”—in which people subconsciously use irrelevant information to make decisions. Understanding this heuristic allows an advisor to educate clients about how to handle new financial experiences.

Imagine an experiment where a volunteer is placed inside a functional magnetic resonance imaging (fMRI) machine and presented with a dish of her favorite ice cream. The machine’s readout would show areas of her brain lighting up due to positive emotions and spiking dopamine levels. These are indications of a desire for the ice cream. 

If the researcher waits 15 minutes after the volunteer eats the first bowl and presents her with another bowl of the same ice cream, the fMRI readout would show that her brain isn’t reacting as positively. This is because, during the wait, the vagus nerve that connects her stomach to her brain would signal that her stomach is full.

If the researcher asks her to eat the second bowl even though her stomach is full and, 15 minutes later, presents a third bowl, he will notice the subject’s reaction shift dramatically. Instead of being positively aroused, her brain sees the ice cream as bad and she recoils.

If the experiment continued, it could cause a permanent change in how the subject experiences ice cream, so a good scientist would stop.

Experiences Matter—a Lot

Humans are incredibly sensitive to experiences and remember them for a long time. Many advisors recall how, after the Great Correction of 2008, clients who had been enthusiastic investors became anxious and risk-averse. Now, almost two decades later, some investors are still highly reactive to tiny market fluctuations because of their past bad experience.

In his 2011 book Thinking, Fast and Slow, behavioral economist Daniel Kahneman explains that this happens because the brain uses two systems to make decisions. What he calls System 2 is slow, deliberate and analytical. It is how we sort information and come to logical conclusions. Importantly, this part of our brain is largely uninvolved in the ice cream experiment. 

In contrast, System 1 makes decisions quickly and without deliberation. The first time you tasted ice cream, your System 1 brain had an “aha!” experience and now reacts positively when it sees ice cream. This is called anchoring: when previous experiences are instantly associated with a similar experience in the here and now.

Anchoring Is Everywhere—and Mostly Out of Our Awareness

Positive experiences create anchors that deeply impact the way people make decisions. My friend loves going to professional baseball games. It’s his passion. I like baseball but would never consider buying season tickets. 

Why is his experience so different from mine? Because of an anchoring experience he had as a child. When he was young, his father and grandfather took him to a game. He has vivid memories of every moment and recalls it as one of the happiest days of his life. Today, his brain still lights up in anticipation of repeating some of the aspects of that wonderful event.

Negative experiences also cause anchoring. Can you recall an unfortunate experience with a food or beverage? Do you eat or drink that item now? My traumatic experience with lima beans still haunts me. 

What Does This Have to Do with Being a Financial Advisor?

The concept of anchoring creates an interesting opportunity for financial advisors. If an advisor works hard to understand the positive and negative experiences of a client’s life, she can set herself up to be seen as someone of significance to him.

For example, a client’s experience of accumulating wealth gives an advisor a tremendous opportunity to share helpful insights as clients move through their life stages.

As clients accumulate wealth, an important transition happens. Early on, they are anxious about whether or not they will be okay in the later stages of life. As they become wealthier, their confidence about the future gets stronger. They are less anchored to the negative past experiences of worrying, “Am I going to be okay in the future?”

This is the perfect opportunity for the advisor to show herself as a valuable resource. She can open the conversation to topics that the client may have been unaware of and point out parts of a financial plan that may have been overlooked in the past. This is the time to show the client what he is missing that could hurt him.

Walking the Tightrope

The highly effective advisor manages a balancing act between understanding the ways her clients’ past experiences (positive and negative) affect their investment-management decisions and educating clients about the new experiences they are having and what they can or should do about them. 

Upcoming Webcast: Secrets of Successful Advisors: How to Talk About What You Do

For more on this balancing act and an exploration of how to talk about what you do as a holistic wealth advisor, register for our next practice-management webcast on February 13.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.

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