How our five brains affect financial advice

The world of financial advice is becoming increasingly complex with new regulations, new technology and new client expectations. Building a meaningful relationship with clients can mean the difference between success and failure. In this respect, understanding our brains and how we interact with the world around us is critical.

I recently had an interesting discussion with author and neuro-management expert Dr. Carlos Davidovich. We talked about his latest book (Five Brain Leadership: How Neuroscience Can Help You Master Your Instincts and Build Better Teams, co-authored with Jennifer Elizabeth Brunton) and how it applies to financial advice.

The reptilian brain

The “reptilian brain” is the oldest and most primitive part of our brain, responsible for our survival instincts. In financial affairs, this brain often takes the reins, triggering instinctual reactions such as greed and fear (or flight vs fight) in response to market movements. Understanding these instincts is the first crucial step in managing our clients’ responses to market sell-offs, for example, or to the fear of missing out.

The emotional and rational brains

Next, there is the interplay between our “emotional brain” and our “rational brain.” These two components act as a “dynamic duo,” with one focused on emotions and the other on logic. As much as we like to think that we are rational decision-makers, emotions play a significant role in influencing our actions and choices — particularly in financial decisions. In fact, research shows that without our emotional brain, we would be less decisive, not more.

Therefore, it’s imperative for financial advisors to understand the emotional triggers that affect clients’ decisions. For example, losses suffered in the 2008 global financial crisis might be an emotional trigger for investors facing new market turmoil.

The heart and gut brains

While the “heart brain” and the “gut brain” may not be as commonly discussed, they hold unique insights into our decision-making processes and can provide valuable perspectives on client behaviour, adding depth to our advisory capabilities.

Evidence shows that there are hundreds of millions of neurons in both our hearts and our guts. In fact, we often rely on our guts but feel embarrassed to say so and search for a rational explanation to support a gut decision. The reality is that, as researchers like Dr. Gerd Gigerenzer have shown, what we call gut instinct is often the result of experiences that we simply cannot translate into words.

For example, if you ask a Major League baseball player how he knows where to run to catch a fly ball, he couldn’t explain it, according to Gigerenzer. What the player is doing, though, is observing the initial angle of the ball and running to keep that angle constant.

This doesn’t mean that these “brains” should overrule the dynamic duo, but they also shouldn’t be ignored.

Observing ourselves

Understanding these five facets of our brains isn’t straightforward. It requires a skillful blend of attentive listening and a willingness to challenge our personal biases and assumptions. Dr. Davidovich refers to this practice as “metacognition” or self-awareness. By observing ourselves from an external perspective, we empower ourselves to maintain composure, make more informed decisions and respond effectively to the needs of our clients.

The role of trust in turbulent times

During market volatility, when the “reptilian brain” is likely to be in control, trust emerges as the linchpin of successful advice. Advisors who have meticulously nurtured trust with their clients in calmer markets are better equipped to guide them through turbulent market conditions, give them confidence and inspire discipline.

By recognizing and effectively managing our different brains, advisors can enhance their decision-making and communication skills. In the intricate world of financial advice, understanding the subtleties of our five brains can help us be the trusted advisors that clients are seeking, particularly clients who are new to investing. It’s a path to building trust, helping clients make more informed decisions and achieving enduring success in the changing world of financial advice.