In my last post, I discussed how the bias of mental accounting can affect financial clients, particularly in the problem recognition stage of the buyer’s journey.
This post continues with our fictional client, Trevor. We’ve helped him to overcome his mental accounting bias, but we have two more biases to overcome: confirmation bias and loss aversion, both typically occurring later in the buyer's journey.
Stage: Information Search
Bias: Confirmation bias
Confirmation bias occurs when we subconsciously seek out evidence to confirm the ideas that we already have. Even Warren Buffet works on avoiding this!
When Trevor begins researching his problem (getting out of debt and investing for retirement, while still feeling secure in case of an emergency, etc.) he may naturally gravitate toward information that confirms his fears and preferences. For example, he might find himself talking to his friend who lost his job and subsequently his house. He may also end up reading articles about the risks of investing for retirement.
What You Can Do
Discuss multiple viewpoints or options.
When you offer and explain multiple solutions to a problem, you give your customers the opportunity to engage with additional information and form a well-rounded opinion. By discussing the possibilities that exist and explaining when and how they can each be beneficial, you provide an unbiased opinion that builds trust with your customer and gives her access to information she may not otherwise seek out. This also gives you an opportunity to attract and engage with customers who do not already share your opinion.
Bias: Loss aversion
Let’s assume we have offered Trevor well-rounded and unbiased information to consider. He is aware of what options exist for helping to pay down his debt and save for retirement; he is beginning to form an opinion about what might be best for him.
As he weighs each possibility, loss aversion comes into play. Making a change–even if it’s for the better–comes with some type of cost or risk. Any new cost or risk is amplified in the customer’s head, no matter how small it is, because it is different from the risk he is currently experiencing and accustomed to. Not only are risks over-emphasized in the brain, they are also weighted more heavily than potential gains. Some studies suggest that the pain of loss is worth twice as much as the pleasure of gain.
The most common example of this I see is investors failing to move their money, citing the fee percentage as the cause despite paying higher fees to their current firm. They are more comfortable staying as-is, simply because it feels less risky.
Because of loss aversion, Trevor is now hesitant to invest into a retirement account. The new risk is amplified in his mind, and the benefits are downplayed.
What You Can Do
Be open and clear about all risks and benefits.
Be honest, and come from a place of educating and understanding instead of closing. Validate the concerns your client has, and offer explanations and comparisons to his current situation. Be willing to conduct a risk versus benefit analysis. Acknowledge that making a change is a challenge, and give them a full view of what to expect—including the continued support you will offer throughout the process.
You do not serve anyone well by sweeping the challenges under the rug, but don’t forget to sing the praises of the benefits, too! By understanding, validating, and offering clear expectations you can help alleviate some of the anxiety that comes with adopting new risk.
Customers can easily fail to make sound financial decisions because they have fallen victim to one of these mental biases. By acknowledging these biases, knowing where they often occur in the buyer’s journey, and communicating with customers accordingly, you can help to arm your customers to make the best possible financial decisions.