The role of the financial adviser in the face of the saver’s cognitive biases

The financial adviser, among other things, must know how to manage the saver’s expectations, addressing the biases that arise from unrealistic goals or mistaken ideas about how markets work.

By Francesco Megna*

The so-called cognitive biases that influence investors are one of the main sources of instability in financial decisions. Biases are mental shortcuts the brain uses to simplify complex decisions, but which often lead to irrational judgments, especially when the market is volatile or emotionally charged. Understanding them is essential not only for those who invest, but also for the financial adviser who must guide the client towards more balanced decisions.

One of the most widespread biases is overconfidence (excessive confidence), that is, the belief that one has more knowledge, ability or control than it is realistically possible to have in certain circumstances or work experiences. In the financial sphere, overconfidence leads people to overestimate their own preparation, reducing their in-depth study of the factors that drive investment decisions and thus putting sometimes very substantial sums at risk. It affects above all younger operators and those who chase a temporary speculative success (which, in hindsight, often turns out to have been sheer luck), seeing it as the natural outcome of their own unconditional skill in trading securities or financial products. Generally, those who have been operating in the market for many years are immune to it, having accumulated greater experience in the sector; but this attitude leads the investor to overweight securities they believe they know, to ignore their real risks or to engage in excessive trading, often damaging long-term performance. The most extreme form of overconfidence also appears in the belief that one can predict market movements, when in reality most fluctuations are driven by factors that are difficult to foresee.

Confirmation bias is equally insidious, because it pushes people to seek only information that is consistent with their own opinion and to discard anything that contradicts it. This distortion can lead to errors of judgment and distorted views of reality, influencing decisions, opinions and beliefs not only in investment decisions, but also in other areas of life, such as science, politics and society. This mechanism makes it difficult to reconsider one’s convictions even when clear signals emerge that would require a change of strategy. In practice, an investor convinced that a sector will grow will tend to ignore negative analysis, selecting only the news that reinforces their thesis.

Another key bias is loss aversion, according to which a loss weighs psychologically more than twice as much as an equal gain. This dynamic leads to suboptimal choices: some investors become excessively cautious at the wrong times, avoiding attractive opportunities, while others refuse to sell securities that are losing value in the hope of recovering, remaining tied to positions that erode the portfolio. Linked to this is anchoring, that is, the tendency to fixate on an arbitrary reference point, such as a past price, a psychological threshold or a personal target, which often no longer has any connection with the current context.

In moments of collective euphoria or panic, herd bias emerges, leading people to follow the decisions of the crowd without any real assessment of the fundamentals. This bias embodies the tendency of people to imitate the group’s behaviour without independent critical analysis, and stems from the desire for belonging and social security that comes to the fore especially in situations of uncertainty, such as in financial investments. It is a phenomenon that fuels speculative bubbles and panic selling, because collective behaviour becomes more important than rational analysis. This is particularly evident in markets dominated by real-time news and social media, where emotions and narratives spread rapidly in a completely irrational way.

Our analysis cannot overlook some important biases, such as the illusion of control, which leads the investor to believe they can influence events that in reality depend on the market, and the recency bias, which pushes people to base decisions on the most recent events while ignoring the history and cyclical nature of markets. The endowment effect, on the other hand, leads people to overvalue what they already own compared with alternatives, making portfolio restructuring difficult even when it would be advisable. In this scenario made up of beliefs and prejudices, the financial adviser takes on a strategic role, because he or she acts as a filter between emotions, distorted perceptions and rational decisions.

The adviser’s role is marked by a few fundamental steps. The first is diagnosis, that is, observing the client’s behaviour, identifying their reactions to volatility, determining how they make decisions and which biases affect them most. Every investor has a different emotional pattern, and recognising it allows the adviser to anticipate recurring mistakes. The second step concerns building a decision-making process that reduces the impact of biases. This means defining an asset allocation consistent with objectives, time horizon and tolerable risk, establishing clear rules for entry and exit, and formalising a long-term plan that limits impulsive decisions. The adviser thus becomes a “behaviour architect”, a professional who designs a context in which discipline prevails over emotionality.

During periods of financial stress, therefore, the adviser’s main task is to restore clarity. This means explaining the negative events underway in understandable language, placing the news in context and reminding the client that volatility is natural and that well-constructed portfolios are designed to withstand shocks. Moreover, the adviser must know how to manage expectations, addressing the biases of the saver that arise from unrealistic goals or from mistaken ideas about how markets work. To achieve this goal, the adviser must gradually educate the client, making clear that there is no such thing as a zero-risk return, that diversification is protection that does not completely eliminate fluctuations, and that negative phases are not only inevitable but an integral part of the journey.

Finally, the adviser has the task of turning the relationship into an ongoing process. Periodic reviews, constant monitoring and open dialogue make it possible to correct emotional deviations before they turn into costly mistakes. Ongoing financial education reduces the impact of biases over time and increases the client’s ability to make informed decisions. Indeed, biases cannot be eliminated, but they can be recognised, contained and managed through a method. The strength of the adviser lies in turning the emotional complexity of the client/investor/saver into an orderly path, helping them make choices that are difficult for them but essential to manage and protect movable assets over the long term.

* Commercial manager, primary hub of a banking group, coordinator of private and business managers