How to deal with irrational clients

Speaking at the event this week, Glen Wright and Jonathan Butler of NZ Funds Management discussed the increasingly prominent field of behavioural finance and how advisers can use its insights in their own businesses. 

One of the central tenets of behavioural finance is that, contrary to standard financial theory, humans are not rational investors.

Even geniuses can find themselves victims of humanity’s irrational instincts; Butler used the example of Sir Isaac Newton, who lost £20,000 (£2.4 million in present day terms) investing in the South Sea Company bubble in 1720, having earlier sold out at a considerable gain.

Butler said investors have a natural tendency to buy high and sell low, highlighted by figures from research firm Dalbar showing that between 1987 and 2006 the S&P 500 Index returned 11.8% per year but investors only achieved 4.3%.