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6 questions that can reveal clients’ behavioral biases

Sometimes I like to trick my clients — but then I tell them I’m doing it for a good reason. I ask them certain questions that, when they answer, teaches them something about themselves. It shows them they are susceptible to costly behavioral mistakes. Try answering some of these questions yourself first before reading on. Then, if you’d like, try them with your clients. Sure, some of these questions are totally unfair, but so are some of the pitches from our industry.

1) In college basketball, what percent of the time does the team behind at halftime come back and win?

Typically, I get responses from 30% to 50%, but have had guesses as high as 90%. With the help of retired NBA veteran and founder of Sweven Wealth, Troy Murphy, it’s about 23%, according to an analysis of 5,599 games played last season.

It turns out that the team behind at halftime is usually the inferior team. Yet that team, of course, is the same team that shows up in the second half. Therefore they end up on the losing end of the final score the vast majority of the time. So why do we generally guess much higher? Optimism and representativeness. How many Hollywood movies have you seen where the horrible team at the beginning of movie finishes the season in first place at the end of the movie? We love comebacks and optimism leads us to believe these comebacks are common.

Second, when you read or watch sports recaps, what team typically makes headlines — the one that was down by 15 at halftime and lost by 25? Or the team down by 15 which came back and won in double overtime? The latter is the obvious answer and this leads us to believe it’s more common than it is.

So what does this have to do with investing? Well, how many one or two star funds have you seen advertised lately or ever? How many financial shows have you seen where a manager talks about their mistakes? We constantly see the success stories and optimistically think we can find these great funds, whose performance will persist. You’ll never see an advertisement like this:

Lesson: Ask what bias is in the data and be a realist rather than an optimist.

2) You meet a woman and get to know her a bit. She is very quiet and has little interest in other people. She rarely goes out. She is, however, very helpful and knowledgeable. She has an undergraduate degree in English literature from the University of Pennsylvania. Do you think she is:

a. A librarian?
b. A sales rep?

Most people fall into my trap of stereotyping librarians as quiet and shy and sales reps as outgoing. But I held back one piece of critical information and that is that there are nearly 100 times more sales reps than librarians in the U.S. Given those odds, there’s a much better chance she works in sales.

We tend to overconfidently rely on the information we have to make a decision rather than seek other information that may be even more relevant. This is especially true if we believe the person giving us this information is knowledgeable and trustworthy.

Typically, when I review a client’s portfolio and ask why the client bought an investment, they respond with the story they were told that sold them on it. I then give them the data and logic they weren’t told.

Lesson: Be a skeptic. Ask for more information. Don’t just believe an expert’s compelling argument when they might also be withholding critical information.

3) Here’s a simple one that everyone should get right. Take 20 seconds to count the number of “Fs” in this short sentence.


Simple doesn’t mean easy. If you are like me, you didn’t count all six. Perhaps you read the “F” in the word “OF” as a “V.” My mind did when I first saw it. Often times, we take mental shortcuts and do simple tasks wrong. These are known as heuristic biases. One costly heuristic bias: Jumping to the incorrect conclusion that a 20% loss and followed by a 20% gain leads back to breakeven. Or we might grossly incorrectly predict probabilities.

Lesson: Be wary of biases and slow down your thinking.

4) How many patterns can you find in the following picture? The cells are white or black. For example, do any rows, columns, quadrants or sides have more black cells? The right half has more black squares, the bottom right quadrant is filled as is column D. Column C is blank while the upper left quadrant has only one black cell.

It may surprise you to learn I generated this on MS Excel using a random number generator with each cell having a 50% probability of either being blank or black. I’ve tricked you into data mining, which is finding patterns out of randomness. In investing, this leads us to find patterns such as “go away in May” or find multi-factors that worked in the past.

We humans can’t think randomly. If you don’t believe me, try randomly writing the outcome of an imaginary coin flip 30 times. Write “H” for heads and “T” for tails before reading on.

You’ll find you are following a pattern and, which once discovered, will only lead to you following another pattern.

Lesson: Random events can look like patterns as we humans are predisposed to find them. That leads clients to buy or sell after they’ve discerned a pattern — even though it was random and unlikely to repeat.

5) You are in a logic seminar with 100 people. The leader asks everyone to write down a number between 0 and 100 (fractions allowed) that will be 80% of the average number selected by the group as a whole. What number do you pick?

When I teach this to a class, the typical answer is around 20 to 40. This is totally illogical. Logic dictates we would pivot to zero. If you think the average would be 50 then you should guess 40 (80% of 50). But everyone in the class is logical so they will guess 40, meaning you should guess 32. This should continue all the way to approaching zero.

Lesson: We are not logical beings. Humans drive markets. Thus, markets can remain illogical longer than you can remain solvent. To beat the market, one must know how other investors will behave including their illogical behavior.

6) You have been gifted $10,000 and bought 100 shares of two different stocks at $50 per share each. Over the next month, one stock plunged to $25 a share while the other one surged to $75 a share. If you have to sell one stock, which do you sell?

a. The $25 stock
b. The $75 stock

I teach this one to CPAs and roughly 80% say they will sell the winner $75 stock. Imagine their reaction when I tell them they have made an uneconomic choice by relying on their emotions — happiness about taking a gain. They will now have to pay more taxes.

Note the way I carefully phrased this question: The stocks were held in your taxable account (since it was a gift) and you will have a short-term gain on the $2,500. The loss, on the other hand, provides you with a tax savings. The gain will cost you in taxes while the loss provides a tax benefit.

But our minds are anchored on the $50 purchase price and our emotions — selling the winner locks in our brilliant choice while the loser may come back, we speculate. Sell the loser now and you’ve locked in your bad move forever. Thus, our emotions drive the action instead of economics.

Lesson: Don’t think you are smarter than the market — stocks are fairly valued. When you have the opportunity to realize a tax-loss harvest, take it.

Let’s be clear, being irrational isn’t always a bad thing. Meir Statman, a finance professor at Santa Clara University, illustrates this point vividly with the example of a $100 bill and a dozen roses.


Let’s say for my anniversary I have the choice of giving my wife a crisp $100 bill or a dozen red roses. Clearly economics says the $100 bill has far more utility as she can buy anything she wants with the money, including a dozen beautiful red roses. It would clearly be illogical for me to buy the roses and, if she objects, I could explain the logic to her. As clueless as I am, even I know that wouldn’t end well.

I tell clients that we are emotional beings rather than logical wealth maximizers. The most we can do is be aware of some of these irrational feelings and control our behavior. A little irrationality is fine but it’s our job to help clients (and ourselves) avoid the big costly mistakes.

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