Improving Habits: Help Your Clients Develop Better Investment Habits

Over 40% of our daily activities are not conscious decisions, rather habits. These daily activities include decisions about investing and other financial choices. While people would like to think they analyze every important decision, the truth is that the brain looks for quick answers. These quick answers are often the result of intuition and/or habit. Habitual thoughts and actions pertaining to the financial markets influence many poor investment decisions.

Financial advisors can play a significant role in helping their clients develop better investment habits. The term “behavioral coaching” is ambiguous and overused, but that doesn’t mean it can’t be beneficial when properly incorporated into an advisor’s business. Behavioral coaching is about teaching and encouraging good investment habits…including how we think about investing. Incorporating behavioral finance actively and consistently is far more valuable than talking about the market, short-term moves or providing forecasts.

Improvement Can Happen Today

92% of people fail to achieve their New Year’s Resolutions. One-third give up just after one month and more than half give up within six months. This statistic may seem high, but it shouldn’t be that surprising. If we really want to change something about our lives, we would make the change right away. Why would we live our lives in a suboptimal way while we wait for January 1st to make improvements? What is so special about January 1st? It is gimmicky. It’s a day just like April 18th; the sun rises and sets just like every other day of the year. To borrow a line from the movie When Harry Met Sally, “when you realize you want to spend the rest of your life with somebody, you want the rest of your life to start as soon as possible.”

Indeed, if you really want to affect change in your life, you should do it now – and not wait for some arbitrary date in the future. Waiting for a future date is like saying, “I should improve this, but it’s not important enough to do right now”. Procrastination is not the fruit of someone who wants to change. True commitment often results in immediate change. Many of our activities, including some of the things we want to improve, are driven by habits. Habits are routines that are ingrained in our brain through frequent repetition, and are often subconscious. If you want to change a certain outcome, there is a good chance a habit (or several habits) will need to change.

Today is a great day to change. Today is a fantastic day to improve your habits to achieve a better outcome. In fact, today is the best day…because it is not tomorrow.

Overview of Habits

Each habit creates a neurological pattern in our brain. It is a physical pathway that is followed once a certain stimulus is presented. This pathway is initially traced by making conscious decisions, but as those conscious decisions are repeated over time, the pathway becomes deeper and the behavior becomes automatic and subconscious. The habit is formed and becomes the default response given the stimulus.

Once we recognize an undesirable habit we want to change, we follow the same process as when the undesirable habit was initially formed. When presented with the stimulus, instead of allowing the automatic habit to take over we consciously follow a few new steps (the new habit). This is difficult because it takes effort and willpower. We are now doing something that is foreign to us. We are not used to it. It can be frustrating and mentally tiring. That is why many people give up after a relatively short period of time. The existing habit has been formed through years of repetition, and we expect that a new habit should take hold in just a few weeks. If it were only that easy.

The Habit Loop

Charles Duhigg, author of The Power of Habit, did a wonderful job explaining just how habits work.He simplified it to three acts: the cue (stimulus), the routine (habitual behavior) and the reward (desired outcome).

Now that we understand the workings of a habit, we can define what it takes to replace a bad habit with a good one. Habits cannot be eradicated, only replaced. Remember, there is a physical neural pathway in our brain of the habit. While we cannot erase it, we can override it with a new pathway.

Step One: The Cue

We need to first understand what cue (stimulus) results in the habitual behavior. The cue is often an external factor that will happen outside of our control (i.e. the sun rising). The brain recognizes the cue and responds according to the neural pathway (habit). When learning a new habit, the cue does not change. A common cue for investors is what the market did on a certain day or a news headline.

Step Two: The Routine

If the cue is the sun rising, the routine may be to turn on the shower to get the water warm and brush our teeth while we wait. Think about your morning routine. What do you do first when you wake up? How often do you consciously think about those steps? That is the routine, or habitual behavior. This is the part that changes when learning a new habit.

For an investor who sees a news headline (cue), the routine may be to login and see how his/her accounts are doing. An investor who sees that the market is down X% (cue), may sell some stocks (routine).

Step Three: The Reward

The reward is the reason we do the habit to begin with. For personal grooming, the reward may be to be clean, smell good and/or to wake ourselves up. The reward can be a physical reward (clean body) or an emotional reward (feel good). The reward does not change. For investors the rewards could be financial, but it seems that experiencing some kind of emotion is the predominating driver.

Replacing Habits

To effectively change or replace a bad habit with a good one, the first place to start is by identifying the desired reward. And we may need to look deep. What good thing is the person attempting to accomplish? What feeling are we seeking by engaging in the habit? Is it to increase our sense of self worth? Is it to feel a sense of security? Is it to relax us? If we can find out the desired feeling, we can put together a list of more positive actions/routines that will also result in the desired reward.

For example, many investors seek assurance when markets are volatile that they will still meet their financial goals – that everything will be OK. That is a very desirable feeling; unfortunately many investors seek to accomplish it by acting in ways that provide instant, temporary relief, but at significant long-term costs. The key is to understand the reward they are going for – assurance (or whatever it is). We can’t control the cue, but we can suggest more productive routines to accomplish the same reward. So how can you help your clients act in ways that will provide the desired reward without making significant and costly investment mistakes? It’s not just about saying something one time. The effective answer is likely more of a process of communications you will need to adapt into your business.


Remember that the old habit has been around for a long time – perhaps years or decades. It is unrealistic to expect that a new habit will replace the old one over a period of weeks or months. It will take a lot of repetition and time. You need to understand this so you don’t get discouraged or upset if the client doesn’t respond favorably at first. There will likely be failures and relapses to the old behavior along the way. But failure only occurs when someone gives up. Prior to that it isn’t failure; it’s just that they haven’t succeeded yet. There will be trials. Your job is to encourage and go the extra mile for your client. At times you may be the one carrying the load. Be your client’s greatest cheerleader.



Learn About The Behavioral Finance Network