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This is an excerpt to the full whitepaper by Charlie Gipple: "What Robo-Advisors CanNOT Do That You Can An Introduction to Behavioral Finance"
The Brain is a Powerful Thing
The date was May 6, 1954. Up to this point in time, it was clear, it was impossible. Sports scientists, medical doctors, world class athletes from across the world said it was absolutely impossible to athletically accomplish this feat. Our bone structure was all wrong. We were not aerodynamic enough. Humans had inadequate lung power and inadequate heart power. All of these excuses were used and millions of athletes tried but failed. This challenge went all the way back to the ancient Greeks and nobody could do it. However, on this day, somebody proved wrong all of the pundits and athletes before him. His name was Roger Bannister. Here is the interesting part. Over the next 12 months, 37 more people broke the 4-minute mile. In the second year, thereafter, 300 more people broke the 4-minute mile. 337 people broke the 4-minute mile within two years of Roger Bannister accomplishing this feat that was “absolutely impossible.”1
What is my point? My point is it’s all psychological! The Human Brain is an amazing thing. This little three-pound thing between our ears that usually takes up about 2% of a human’s bodyweight and has 100,000 miles of blood vessels is one of the most powerful things on earth. Of course, I’m talking about the human brain. It’s that powerful! There isn’t any other animal (except for maybe a dolphin) that has the brainpower like we do. For example, although an elephant’s brain is physically larger than a human brain, the human brain is 2% of our total body weight, where an elephant’s brain is .15% of their bodyweight. Meaning humans have a very large brain to body mass which makes us one of the smartest species on earth.2
Furthermore, because we are so smart, we can predict events that other species cannot predict. For example, I know when lightning streaks across the sky, there is the sound of thunder to follow. I know that if I am on the street and there is a car coming towards me from ½ mile out, to get out of the way. I can predict that if I bring home a Harley Davidson today, to my wife’s surprise, I will be single the next day. We have predictive capabilities that no other species on earth has.
Here is the paradox, however, because we are so smart we are also so dumb. Because we can predict things that other species cannot predict, we tend to think we can predict things that are impossible to predict. This is an example in behavioral finance of what is called “Overconfidence Bias.” Have you ever seen a client that thinks they can predict the stock market and makes irrational decisions as a result? Have you ever run into a client that believes they do not need life insurance because they will live to a ripe old age? Have you ever spoken with a client who says he will never need long-term care because he/she will “just die”? The problem is, markets are unpredictable, mortality is unpredictable, and morbidity is unpredictable! There are some things in life that are hard for a human being to predict, unlike hearing the sound of thunder following a lightning strike. This “overconfidence bias” is an example of the 117 documented biases that behavioral finance studies and works to find solutions for.3
If you would like a copy of this whitepaper please contact our Partners Advantage Marketing Team at 888-251-5525, ext. 138 or email news@partnersadvantage.com.
For financial professional use only. Not for use with consumers.
1 Mackay, Harvey, 1988, Swim with the Sharks.
2 “Thinking About Brain Size,” http://serendip.brynmawr.edu/bb/kinser/Int3.html, last accessed 3/10/16
3 Source: “Conquering Concerns: Selling Through Behavioral Biases”
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