Kiss and tell

Let's just all think about kissing for a moment. Why do we find it pleasurable to share saliva? It's not essential to the propagation of our species, and is not something brought about by our genes.

How about something less messy, like blushing? Even Darwin struggled to explain why we evolved a response that so clearly lets others know that we have cheated or lied.

Despite the advances of anthropology, medicine and genetics, we still have no clear idea as to why we create art. Is it for sexual display, a learning tool or some form of social glue? Whatever its reason (and you may argue that there needn't be one) art, like kissing and blushing, refuses to be pinned down.

Nonetheless I think we can all agree that the human experience is enriched by their persistence across all social and geographical boundaries, and over many centuries of recorded history, despite their having little to do with our survival.

So, how does all this affect you and your clients?

Well, I suspect that most of your clients, like mine, are members of the human race, and we would do well when working alongside and advising them, to bear in mind their innate tendencies - as irresistible and irrational as our own - to do things that aren't necessarily in their longer-term interests.

I see many investors instinctively exhibit behaviours that are repeatedly shown to be disadvantageous given their objective of steadily accruing wealth over time. The long list includes:

• Trend chasing: the tendency to buy assets that have recently increased in value.
• Home bias: a preference for investing in domestic stocks or funds, thus neglecting international diversification.
• Local bias: a preference for investing in companies with headquarters close to the investor - the same applies to buy-to-let properties.
• Under-diversification: investment in only a few securities and/or highly correlated securities.
• Anchoring under uncertainty: setting a price based on an arbitrary number is clearly stupid and it's something that the majority of us wouldn't do if the decision is clearly presented to us. But it's not and we do.

The important point is that these behaviours are entirely human and while they are not strictly rational, they are predictable and understandable.

Good education

The positive news is that there is some evidence that financial education programs may improve individuals' financial decision-making (see Building the case for financial education by Jonathan Fox, Suzanne Bartholomae and Jinkook Lee for an overview). Yet the average level of financial literacy continues to be low.

Programs that target and exploit specific behavioural biases (see Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler and Cass Sunstein) offer promising alternatives and have even been embraced by governments - talk to your HR department for the latest on the roll-out of auto-enrolment into a pension scheme near you.

Financial advice, on the other hand, is sadly all too often found not to help investors, either because it is subject to agency conflicts causing bias or because investors simply do not adhere to it. For this reason, all good advisory practices have robust structures in place to ensure consistent outcomes for their clients. A methodical approach to investing is essential if we are to keep our clients from slipping back into bad habits and, perhaps more importantly, to protect the clients from our own inherent biases and tendencies.

A significant threat here is client apathy; for most individuals there are plenty of more interesting things to do than worry about the tax treatment of a particular transaction; they leave this complicated stuff to you for a reason. Most advisers will work hard to get the best outcome for their client but it is not enough, in an age saturated with information, to merely provide the necessary information when giving advice.

When taking important decisions, clients need to be challenged, educated and encouraged to think about the 'what' and the 'why' in a way that disrupts the pattern of their usual behaviour. As fallible humans, it's far too easy for them to do the wrong thing and for it to feel right.

Get them engaged and you increase the likelihood of them making the right decision. You never know, you may even get a peck on the cheek for it. Try not to blush.

Steven Hennessy is a chartered financial planner and associate director at Myers Davison Ginger

He writes a regular blog about behavioural finance for Private Client Adviser