Chuck Jaffe hosts Money Life with Chuck Jaffe, a daily financial talk show focusing on investing and planning. He invited Arnerich Massena Co-CEO and CIO Bryan Shipley, CFA, CAIA, to join him for a segment to talk about Arnerich Massena’s recent white paper, “Behavioral Economics: Understanding your unconscious to become a better investor,” and to share with the Money Life audience why human wiring seems to get in the way of our own best interests when it comes to planning and investing.

In the interview, Shipley explains that traditional economic theories hinge on modeling a hypothetical individual who is perfectly rational and self-interested, able to take in all available information and spit out the most logical choice. But of course, “humans are amazingly complex and very often emotional beings.” He discusses the vast amount of information we integrate and act on every moment, just to be able to walk, drive a car, or play a musical instrument, “much of which happens in the unconscious mind.” This may be great for navigating daily life, but can undermine people when it comes to decisions that require more careful, rational thought, as in investing. “All our mental shortcuts can derail our rational judgment,” he remarks.

Jaffe asks about why we see such a disconnect between actual market performance and investor confidence, with investors often relying on headlines about unrelated events and economic activity to inform their opinions about the market. Bryan explains what behavioral economists dub the “availability heuristic” — that humans will rely on the most available and accessible information when making decisions, rather than looking for the most relevant information. This often results in a short-term outlook, where vivid recent experiences influence our thinking much more than big-picture understanding and data.

The real message of behavioral economics is that investors need to be intentional in their process, planning, and discipline, rather than relying on instinct. “People don’t hire financial advisors for their planning: they hire them for their discipline,” Jaffe quips. “100 percent,” agrees Bryan. “Discipline is the most important service we provide as an advisor.” He points out that although most people love a sale, they run away from investments that are dropping in price, whereas they seem to forget that as an investment’s price increases, so does the risk. Working with an advisor helps keep people focused on the long term, and an advisor can provide perspective and support when things are difficult.

Listen to the full June 15 show at https://moneylifeshow.libsyn.com/modern-capitals-lowenberg-its-a-new-golden-age-of-fixed-income?tdest_id=2395139. Bryan’s interview segment begins at the 15:45 mark.