Navigating Client Emotions with Behavioral Economics

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There’s no denying that human emotions play a role in managing money. Even someone who’s usually level-headed can get caught up in excitement, fear, or uncertainty.

But what happens when we make choices based on feelings instead of facts and figures? Normally, nothing good. When our clients are caught up in their emotions, is there anything we can do to help them bring logic back into the mix?

That’s where behavioral economics comes in.

This isn’t a novel concept. Back in the 18th century, Adam Smith wrote a book called The Theory of Moral Sentiments, which provided the framework that led to the study of behavioral economics.

In the 1970s, Daniel Kahneman and Amos Tversky used the concepts of cognitive psychology to explain divergences in financial decision-making. They made three conclusions that are relevant to us today.