The Sirenuse Islands off the southwest coast of Italy were famous for being home to the Sirens, whose songs were so irresistibly seductive that seamen felt impelled to fling themselves into the waters in an attempt to reach them. No seaman ever survived, so no living human knew the nature of the Sirens' songs.
Ulysses wanted to be the first human to hear the songs and survive. He instructed his crew to fill their ears with beeswax to block out the sound, then tie him securely to the mast and ignore his pleas to be released, should he do so. The plan worked.
In the same way, financial advisors should invite their clients to commit to a Ulysses Strategy. Regard this as a rational investment plan in advance of movements of the market that might trigger irrational responses.
The first step in the process is to help your clients understand the psychology of trading that can lead to poor decisions. Help them understand that these misguided impulses of the intuitive mind are quite natural, but that there is another, better path to follow, one that is guided by the reflective mind.
The second step is to agree on an investment strategy, which would include an acceptable balance between risky and conservative instruments. As financial advisors, you are already very familiar with this process.
What would be novel for most advisors, however, is to commit to a specific contingency plan. This is an agreement made in advance about what action will be taken should a certain event or condition occur -for example, if the market goes up 25% or down 25%.
The third component of the Ulysses Strategy is to formalize these agreements in a commitment memorandum, to which both the client and the financial advisor are parties. Although research shows that financial professionals are typically less affected by the impulses of the intuitive mind, they are not immune to them completely. And by being co-signatories to the memorandum, financial advisors put themselves on the same footing as their clients.
It helps clients stick with their plan when changes in market conditions might tempt them to go with the herd and make unwise decisions. And it helps financial advisors honor the agreement too.
This memorandum is not binding in the sense of a legal contract. But the act of putting one's signature to an agreement helps people resist the siren call of the intuitive mind.
Shlomo Benartzi is a professor at UCLA Anderson School of Management and chief behavioral economist at the Allianz Global Investors Center for Behavioral Finance. This column is excerpted; to read it in its entirety, go to AllianzBeFi.com or email contactus@AllianzBeFi.com.