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How will you tell your client that he is being foolish?

Nukkad ka Dhoni

Imagine a game of "galli cricket" or "nukkad cricket" that you are playing one lazy Sunday afternoon. You hardly ever play, haven't touched a bat or a ball in years, but got tempted to join the gang playing in your neighborhood one day, just on a whim. As it turns out, your chance to bat finally comes in the last over of the match, with 12 runs required to win from 4 balls. You miss the first ball completely, but connect well with the second and send it soaring for a six. With two balls to go and 6 runs to win, you take a mighty heave on the next ball you face, you middle it fantastically, send the ball into a neighbor's balcony for a big six, and become the hero of the match!

Next Sunday, you are suddenly eagerly waiting for the galli cricket to begin in the afternoon, and when you make your entry, you are given a rousing reception. Your galli has discovered its own Dhoni - the best finisher of the game in your neighborhood!

Lets stop here and ask a couple of questions. What prompted you to wait impatiently for the next Sunday's game? A belief somewhere in your mind that you are a fantastic batsman? And why were you given a rousing welcome in the second week? Same belief about your new found batting prowess? Did you, instead of fantasizing about yourself as your "nukkad ka Dhoni", pause for a moment to reflect on what may have caused you to connect those two big shots? Did the bowler, in a fit of nervousness, bowl you two low full tosses on your leg stump, which you swatted away gleefully? Why did you miss the first ball? Was it your skill that helped you connect those two big shots, or the bowler's errors? What made you win the game for your team - luck or skill?

Most of us in such a situation don't overanalyze what's gone well for us. We instinctively give ourselves credit for things that work well, and look to blame others for things that don't. When something that is actually a matter of chance, goes our way, and we attribute this to our skill and not to chance, behavioural scientists will say we have fallen prey to the fallacy of "illusion of control". We start believing that we are in control of the situation, whereas the reality is that we just got lucky a couple of times.

Illusion of control + money = toxic combination

Illusion of control is a dangerous fallacy when money is involved. We've all heard of people who begin with a winning streak in gambling, get an illusion of control on the game, and then start betting bigger and losing bigger, often leading them to financial ruin. Many investors who "punt" on small cap stocks and win during a phase like 2014 when small caps were racing upwards, start believing in their stock picking skills, and rapidly start diverting larger and larger portions of their portfolio towards their own stock picks in more and more exotic small cap stocks, putting their hard earned money to grave risk.

How will you tell your client that he is being foolish?

When you see this happening with a client, you want to tell him to step back. You want to tell him the truth - that he just got lucky a couple of times, and that he should not mistake luck for skill and then start betting big money on his new found skill. You hesitate though, as this is a delicate conversation to have with him. Are you going to puncture his ego? Will he believe you or will he want to believe his "skill"? Will you become the villain of the piece, in trying to tell your client the truth and help him stay away from taking bigger and bigger risks?

Two research studies can help you get the point across

You want to do what is right, but you hesitate as you don't know how best to do this. If you find yourself in such a situation, share with such clients the following two experiments and their research findings, to help them better understand what "illusion of control" is all about. Once you share this, chances are they will themselves stop and consider whether it was indeed skill or just chance that got them their initial wins.

Almost 50 years ago, a group of 3 behavioural scientists conducted an experiment. They asked people to place bets on calling the right number from a roll of dice. The dice was rolled by the persons placing the bets. For a few turns, the dice would be rolled, the outcome hidden, and the participant would be asked to place his bet on the outcome. For some other turns, participants would be asked to first place their bets, and then roll the dice. Bets could be of varied amounts each time. After gathering findings from a number of participants, for a number of attempts, the researchers found a clear pattern emerging. Bet sizes tended to be much lower when placed after the dice was rolled, and much larger when placed before the dice was rolled. Participants obviously believed in their own ability to somehow influence the outcome - which is why they were willing to place bigger bets before the dice was rolled, but much smaller bets after they had rolled the dice. A classic case of illusion of control.

Ten years after this experiment, another experiment was conducted, by a different team. Individuals were sold $1 lottery tickets. Half the participants were sold tickets that were randomly picked and given to them, while the other half were allowed to pick a ticket of their choice, after looking at number sequences and so on. A week later, on the day of the draw, just before the draw, each participant was asked to quote a price at which they were willing to sell their ticket. The average selling price asked by the group that was given randomly selected tickets, was $ 1.96. The corresponding number for the group that was allowed to pick tickets of their own choice, was considerably higher, at $ 8.67. Here again, those who picked their own tickets, had an illusion that they had higher control on the outcome, which is why their asking price for their tickets was much higher.

First make it impersonal, then drive your point home

The good thing about sharing such research findings is that you drive home the point, without making it personal. Its far more acceptable for us to understand that there is a general human fallacy, which has a specific name for it, and then make the connection that maybe we too are falling prey to the same human fallacy, rather than someone coming up to us and telling us that we are behaving foolishly and that our accomplishments which we are proud about, are only due to luck and not our own skills.

All content in MasterMind is created by Wealth Forum and should not be construed as an opinion of Sundaram Mutual Fund.

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