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Customers Aren’t Rational!

By November 27, 2018June 19th, 2020Advice, Business

Well not always.

Photo by Brendan Church on Unsplash

When I was a student (back before electricity) we learned much about Maslow’s Hierarchy Of Needs as a mechanism to try to understand what makes people make decisions the way that they do. We also studied a little book by Miller and Starr entitled “The Structure of Human Decision Making”. In the subsequent 30 odd years, I have learned that whilst we might like to think that there is, most people make decisions based on how they are feeling at the time, and with so little logic or structure involved that to try to predict behaviour is almost impossible.


I have had a couple of interesting conversations in the last couple of weeks. In late 2018 markets have been very volatile, and the latest correction has seen Australian and International markets decline in value by around 10%. The conversations I am referring to all start the same way, “The markets are falling, I am thinking of getting out”


What this displays is that for many of us, behaviour is often not exactly rational. Emotion is such a big part of the decisions that we all make, that we can often not find a way to separate what we actually do, from what we should do.

Surrounding noise from media and others doesn’t help of course. There are any number of pundits who have correctly predicted 8 of the last 3 market corrections. Negative news sells better than positive news – sometimes it is just better to turn off the telly.

When someone buys a Lotto ticket, they are not buying a piece of paper, they are buying the “feeling” that they get from having a chance to win the big prize. There is no consideration of the odds of winning here, no rational decision to invest money in an activity which has about as much chance of success as I do of winning the Boston Marathon. Actually, they do have a better chance of success, at least they entered.

So what are we to do when we try to influence, in an ethical and scrupulous way, our customers to make a decision which is good for them? What do we do when we try to help them not do something which will in all likelihood have a negative impact on them?

The temptation for numbers people like me is to try to explain with numbers what really needs to be explained with feelings. For my nervous investor clients, I could go back to the history books and demonstrate that previous market corrections are not permanent and have all been followed by continued growth, or explain that their portfolio is not only exposed to shares and that any downward impact will be mitigated by that part of their portfolio which we have rationally placed in defensive investments. All my nervous clients really want from me is “It will all be OK” rather than a lecture.

Warren Buffet famously said in connection with investing “We should be brave when others are fearful and fearful when others are brave”. Note that none of these words are about numbers, it really is all about how we are feeling. It is an emotional response which leads to irrational behaviour. For many, investing at the top of the market (when everyone else is) and selling at the bottom (when everyone else is) seems like logic, when precisely the opposite is true. (For a video on this subject which explains more see here)

In our business, we believe that a major part of our role is in educating and supporting our customers in making decisions which are good for them. We need to connect with our customers where they are, and very often that means we need to try to understand the emotion which is driving them through the decision making process in order to best help them. Sometimes we find it a little difficult to understand, but the quest to do so is always rewarding (and challenging).

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