September 4, 2018 09:45
Michel Villa | Photo : Denis Méthot
Emotions and investments don’t mix. A good adviser will give its full measure by playing the role of guide in the face of panic or euphoria that causes the Exchange.
Michel Villa has harshly taught this lesson. He was laid off as a dealer (trader) at Laurentian Bank due to the poor performance of its investments.
And that is what led to her loss ? “I loved the action ! I provoquais. I was a bibitte emotional. I hadn’t listened to the market. I had become arrogant. Nobody told me “. He fully realized where he was thanked.
Since then, Mr. Villa was built for a training on emotional intelligence in the face of investments. He exposes the major place occupied by the emotions in the investment and on the key role that can play the advisor to counteract this phenomenon. The Journal of insurance has attended one of his presentations, made to the account of the asset manager canadian Bridgehouse, on the 12th of may, to Quebec, and spoke with him afterwards.
“Good advisers become the architects of choice. They will bring the buyers to make good decisions and prevent them from being too emotional. Investors are human beings. They are inclined to make decisions based on emotion, especially when it comes to their money, ” said Mr. Villa.
A whole range of emotions can influence attitudes in the area of finance, support Mr. Villa. “These emotions lead to choices that compromise the long-term plans, the latter being the essence of the success in investment matters.”
A great lesson of humility
The knowledge is necessary in investments, but this is not enough. In the heat of the action, we will often make bad decisions, ” says Michel Villa.
In addition to what he has personally experienced, Mr. Villa has built her training on that of the American Richard Thaler, Nobel prize of economy in 2017 for his studies on behavioral finance and its work on the psychological mechanisms and social actors who intervene in the decisions of consumers or investors. According to Mr. Thaler, all decisions are influenced by biases such as emotions, environment, and instinct.
The investor is driven by these external factors which ultimately, may lead them to make very bad choices. Michel Villa goes further and speaks of self-destructive behaviour. He advocates and how to be in the area of financial management.
Mr. Villa reminded that finance is a sector that values analytical thinking, facts, calculus, statistics, reason and logic. These functions, which are essential for success in the stock Exchange, housed in the left hemisphere of our brain. There is, however, a consideration majeure, the right hemisphere, the seat of the emotions. The right hemisphere may come to thwart the game plan that had given the investor and his advisor.
All sorts of other factors influence the small purchaser financial products : the economic and political news of the day, the bias exposure, the attractions to passengers for some of the titles. The other element, the easy access to investing data. Advisors have observed that clients who were going to see their returns twice a day developed anxiety even though it is normal that the Stock market is aware of daily fluctuations.
However, anxiety is a very bad driver. Some will be anxious to buy during a period of frenzy, others will sell in the event of a breakup of a title or a big market correction.
The financial market is both uncertain, random and ambiguous, said Michel Villa. In the short term, anything can happen. The brain makes no distinction between a real fear and unreal. When the market declines, the fear becomes unreal, he warns.
Rules to remember
For Mr. Villa, there are two types of bias in behavioral investment. First of all, the cognitive bias, or errors of judgment are related to the processing of the information. Then, come the bias of the emotional, or the errors of judgment related to the thoughts, attitudes and feelings. Unfortunately, said Michel Villa, they are more difficult to fix than cognitive bias.
“With the investments, you should keep the cap. The financial advisor becomes a guide to the emotional that will help his client to take a step back. It must listen to and, subsequently, to present him with arguments “.
Mr. Villa has also listed some rules for financial advisors. The first : the advisor must become the devil’s advocate to his client. “It must encourage the client to be more calm.”
As for the know-be that the adviser should possess, this is not a natural thing, according to the speaker. This is something that should be practiced according to him.
“The adviser must have a plan, respect it, and be a long-term liability. It is often best to do nothing during a crisis. It is often the best strategy “.