Understanding Behavior Biases Can Help Plan Sponsors With Investing Communications

Advisers say being easily influenced by recent news is the No. 1 investor misstep, research sponsored by Charles Schwab Investment Management, Inc. (CSIM) in collaboration with the Investments & Wealth Institute and Cerulli Associates.

The top five behavioral biases that advisers observe significantly impacting their clients’ investment decisions are:

• Recency bias (being easily influenced by recent news events or experiences): 35%;
• Loss Aversion bias (playing it safe or accepting less risk then they can tolerate): 26%;
• Confirmation bias (seeking information that reinforces their perception): 25%;
• Familiarity/home bias (a preference to invest in familiar/U.S. domiciled companies): 24%; and
• Anchoring bias (a tendency to focus on specific reference point when making investment decisions): 24%.

Survey results suggest that vulnerability to specific behavioral biases varies by client age. The advisers surveyed say they observe that the following biases are most prevalent within each generation:

• Millennials: Framing bias (making decisions based on the way the information is presented): 54%;
• Generation X: Recency bias (being easily influenced by recent news events or experiences): 64%;
• Baby Boomers: Anchoring bias (a tendency to focus on specific reference point when making investment decisions): 75%; and
• Silent Generation: Familiarity/Home bias (a preference to invest in familiar/U.S. domiciled companies): 84%.

Understanding these behavior biases can help retirement plan sponsors with communications to retirement plan participants. “Recognizing behavioral biases is an important first step to keep emotions in check and avoid missteps that may have a negative impact on long-term financial goals,” says Asher Cheses, research analyst, high-net-worth at Cerulli Associates.

Schwab suggests that offering participants access to advisers can play key role in helping participants understand common behavioral biases and establish guardrails to avoid emotional decision-making.

John Anderson and J. Womack, both managing directors with SEI, suggest in a white paper that there is an apparent need for coaching. And, sources say retirement plan participants need to understand market cycles and volatility so they can resist making the wrong investment decisions.