Sailing the Financial Seas

Ambiguity about the future seems to be at an all-time high. Technology is rapidly changing. Politics are divisive. War, disease, natural disasters, and stock market volatility fill our nightly headlines. At Yeske Buie, we have a heightened awareness to this apparent state of flux as ambiguity and how Clients respond to it is critically important to long-term financial success. In this space, we explore the research behind human behavior in the face of uncertainty and how we at Yeske Buie look to be your experienced sea captain during these times.

Defining Ambiguity in the Age of Uncertainty

The role that ambiguity plays in our lives is a topic that many in the financial planning world have been talking about lately. The Yeske Buie Financial Planning Team, committed to staying on top of the latest research, attended a presentation delivered by behavioral finance expert, Shachar Kariv, and the presentation provided great insights as to what science says about how humans make decisions when faced with unknown choices and how we as financial planners can better serve our Clients to help them make grounded financial decisions.

Before discussing the role a financial planner plays in navigating ambiguity, let’s look at what science says about how human beings react when faced with choices that have unknown outcomes. I’ll use myself as an example. I, like most people, am not comfortable with uncertainty. I tend to stick to the people, places, and things I know best. I am human, and a creature of habit. I have a strong bias to avoid unknowns, such that I will often choose outcomes that are known to me rather than outcomes that have the potential to be tremendously beneficial. I can’t quantify the risks or benefits of these unfamiliar choices, so I simply avoid them.

This pattern of human behavior is known as an ambiguity bias. According to behavioral finance experts, ambiguity bias is the tendency to favor choices with a known outcome, rather than “taking a chance” on an opportunity with unknown probabilities. Biologists theorize our early ancestors may have developed this bias as a protection method against their hostile and deadly evolutionary environment. If you were a bipedal ape living on an African Serengeti 1.3 million years ago, avoiding unknowns wasn’t just a matter of preferred choice, it was a matter of survival. Our brains are literally hard-wired to stick what we know at the expense of what we don’t.

Ambiguity Bias and Investing

The problem with applying this cognitive bias in the modern world, particularly as it relates to investing, is that it can lead to poor decision making and unfavorable long-term outcomes. An example of this bias is how investors tend to choose to invest their money in “safer” investments like government bonds or CDs, at the expense of investing in stocks that have higher expected returns. Because stocks are often associated with higher risk, many investors avoid including a healthy allocation of stocks in their portfolio.

Other examples of investors favoring “known” versus “unknown” investment vehicles include disproportionally favoring real estate, heavily investing in individual employer stock, or investing a single stock sector – their perceived familiarity can make them more attractive to the mind. Finally, perhaps one of the most compelling illustrations of ambiguity bias is how individuals over-allocate to home country markets at the expense of foreign investments. For example, US investors hold roughly 80% of their equity exposure in US stocks, even though the US market capitalization is only 50% of the global economy. Ambiguity bias may be one explanation for this phenomenon.

Sailing the Unknown Sea

Overcoming the ambiguity bias is an enormous part of the value financial planners can provide to Clients. One of my favorite analogies to describe how financial planners can help Clients overcome this bias is to imagine the world of investing and finance as the ocean, and your financial life as a ship on that ocean. Somewhere over the horizon is your ideal financial future, but the way to that future is full of storms, pirates, and hidden shoals. As a ship alone, you are unsure of the dangers ahead, and you’re hesitant to cross the sea. With the help of a financial planner, however, you can feel confident that you have a co-captain on your financial ship. We have studied the risks ahead, the best routes to take, and the most favorable winds to sail. We can help build your financial confidence and encourage you to overcome the tendency to stay close to familiar shores while acting as your financial compass. The list below describes six ways that Yeske Buie can help Clients navigate the sea of financial uncertainty.

1. Bringing organization and clarity to our Clients’ financial ship
   • Whether it’s through cataloging insurance documents, monitoring account beneficiaries, keeping track of estate planning documents, or helping pay taxes, we can help bring order to our Clients’ financial lives so they can focus on other priorities.
2. Offering accountability to help Clients follow through on financial commitments and goals
   • During our Discovery Process, for example, we help Clients prioritize goals and outline the steps necessary to achieve those goals. We then review their progress and support them as they strive to reach their desired objectives.
3. Providing objectivity and insight into issues that help keep our Clients from making emotionally driven decisions
   • We apply analysis and experience to financial matters to assist Clients in making the best possible choices with all the information available.
4. Proactively anticipating our Clients’ life transitions and assisting them to become financially prepared for periods of change
   • We assess the impacts of those transitions and anticipate what may be needed to manage change and thrive financially.
5. Educating Clients to understand and evaluate complex financial topics
   • We help assess and analyze the situation at hand and we provide knowledge so Clients can feel confident that they are making objective, accurate, and reasoned financial choices.
6. Forming a lasting partnership with our Clients by seeking to understand them as a people so they can live the best life possible
   • We work on their behalf as stewards of their money, time, and resources so they can go about their lives, knowing there is always someone there to help should they need it.

As we all know, life can be chaotic and complex – most especially in regards to finances. Here at Yeske Buie, we view our job as being a partner and a guide to help Clients navigate through turbulent financial seas. So next time you are faced with one of life’s transitions, or if you are feeling uncertain about a financial decision, know that we are here to help you manage this ambiguity, and we are available to provide the information you seek to make the best possible choices and achieve all your Live Big goals.