Imagine my surprise when I studied behavioral economics and learned that the ratio of prevention to cure when it comes to working with distressed clients is the same as ounces to pounds: 16 to 1.
The Problem with Loss Aversion
The insight into this ratio starts with Daniel Kahneman’s research into loss aversion. Kahneman described how people feel loss about two and a half times more strongly than gains. This finding was instrumental in revealing why humans don’t consistently make rational decisions. It led to dismissing the simple mathematical models that prevailed in the early days of economic research and turning to a more complicated model, driven by numerous discoveries of hardwired mental shortcuts—which Kahneman called heuristics—dominating the way people make decisions.
These insights have made their way to the awareness of client-facing financial advisors. Rather than assuming clients can cope creatively with volatility in their investments, wise advisors are sensitive to the emotional reactivity their clients will have when markets trend negatively. Rather than being surprised when clients become emotional, advisors can help clients who are upset and by preparing to handle those conversations more artfully.
Why 16:1 Is So Important