Emotion, serotonin and your financial plan

Apr 11, 2023 | Blog | 0 comments

How do you identify the best route to connecting with your client where they are emotionally, and bringing them along on the financial planning journey? More than 90% of human decisions are shaped by emotional neural systems that we share with other species. “The rational brain constructs narratives in support of what the emotional brain has already decided to do – and we are not even aware of it,” said Prof Baba Shiv, professor of marketing at Stanford Graduate School of Business. He spoke at the sixth annual i3 Summit, hosted jointly by Sanlam Investments and Glacier by Sanlam, about neural networks and how they shape emotions, motivation and ultimately your client’s financial plan.

What does your client fear more: failure or missing out on opportunities?

“Your goal as financial adviser is to shape client decisions, both as a decision shaper and a decision maker,” said Prof Shiv, who advocates a deeper understanding of neural networks and the emotional brain to aid advisers in the advice process. An important early step is to consider the two basic mindsets your client may exhibit:

Type 1 mindsets are rooted in fear of failure, and people in this state subconsciously do anything to avoid the pain associated with failure.

Type 2 mindsets exhibit a fear of missing out on opportunities. The concepts of risk and risk tolerance are integral to the field of financial planning, and it is widely accepted that people are more risk-tolerant when they are in a type 2 mindset than in their risk-conscious type 1 counterparts.

Introducing hormones and neurotransmitters

Things get interesting when hormones and neurotransmitters such as cortisol, dopamine and serotonin are introduced to the mix. Prof Shiv explained that the emotional mind moves between states of stress and comfort as a result of changes in the balance of cortisol and serotonin; and between boredom and excitement based on dopamine levels. “If your brain is experiencing stress, it cannot find a comfort state, and your first instinct will be to avoid excitement and not take any chances,” he said. “But as serotonin levels increase (or cortisol levels decrease), the brain is more likely to move to a more comfortable and risk-tolerant state,” said Prof Shiv.

First things first: creating the comfort state

People unconsciously switch between risk-averse and risk-tolerant mindsets based largely on the situation they find themselves in and to a lesser degree on their personalities. Salespeople who make their sales pitch only to be greeted by the line ‘let me think about it’ have typically failed in their efforts to bring their prospect to a comfort state. “The brain needs to be at a stable level of comfort. If it is not, it will be unable to switch mindsets,” said Prof Shiv. Thus the ‘holy grail’ for financial advisers is to make their potential clients comfortable, thereby creating the right environment for them to switch to the risk-tolerant type 2 mindset.

The IKEA effect – involve your client in the financial plan

When a client is in a type 1 mindset, your proposition should rely on tried and tested processes that build their trust in you and validate your abilities, perhaps through sharing testimonials or discussing your track record.

Those in a type 2 mindset typically would like something over and above these attributes because they are keen to explore new and exciting parts of the investment universe. Another popular adviser-client engagement technique is based on a cognitive bias referred to as the IKEA effect. IKEA is a Swedish furniture retailer that sells a wide range of furniture for home assembly. Studies done with two groups of IKEA shoppers found that those who assembled their furniture placed far greater value on it than those who had it assembled for them. “This is why it is critical for financial advisers to work on a game plan with their clients,” said Prof Shiv. “When they start working on the game plan with you, they become invested in it, and the IKEA effect kicks in.”

Where is your client’s serotonin level?

A deeper understanding of neural pathways could increase the probability of engaging with potential clients when they are relaxed and more tolerant to risk. “Laughter is one of the fastest ways to switch the brain from a risk-averse type of mindset to a risk-tolerant type of mindset,” said Prof Shiv, as he explored ways to improve advice outcomes. Age can be a good indicator of mindset due to the dramatic drop in serotonin levels from age 50 onwards. “You can be fairly confident that a person over the age of 50 will start out in a type 1 mindset, so show them validation,” he said. Serotonin levels are highest early in the morning and immediately following meals or exercise.

Your goal as a financial adviser is to shape decisions. One part of this equation involves you shaping decisions for your clients, concluded Prof Shiv. The second part involves you as the decision maker making decisions on their behalf. Depending on the situation, you might have to be risk-averse, play defence and reduce their risk exposure, or be more tolerant to risk and increase risk exposure accordingly.