As a psychology graduate and a student of behavioural economics, I know from the literature that fear is a more powerful force than greed. In fact, fear of loss is about 2.5 times more powerful than lust for gains across a broad spectrum of studies. I take a fair amount of time with clients to try to get a good sense of a person’s true tolerance for loss. This leads to discussions about what people are most afraid of; what keeps them awake at night. Very often, people tell me that they are most afraid of not having ‘enough’. The definition of ‘enough’ consumes most of the rest of our conversations.
How Much is Enough?
Clients often define ‘enough’ in terms of how often they can travel, how much they can give to grandchildren or children, whether they can keep their golf club membership, or whether they can buy a vacation home or boat. People generally want to know that their lifestyle won’t change that much when they retire, and that they will have enough money to fill their free time with ‘adventure’ of whatever sort. Sometimes that means trekking through the Andes or African safaris, and other times people find adventure in their gardens, or in pursuing cerebral passions.
While everyone’s definition of ‘enough’ is different, one criteria is common to hundreds of conversations with clients from many walks of life, though clients very rarely express it directly. People are terribly afraid of failing to keep up with their friends and peers. Further, clients are quite aware of, and sensitive to, their relative standing.
Absolute versus Relative Success and Failure
For example, I recently spoke with a client who had been investing for many years with an investment company that is majority owned by his professional association. Each year during his annual portfolio review, the salaried Advisor from this company would nod reassuringly and tell him that he was ‘on track’. For evidence, the Advisor would state that the client’s financial condition was on par with the financial condition of higher paid specialists in his field of a similar age.
This is interesting from two perspectives. First, it may be that the average specialist in this professional field is in poor financial condition. Second, why should a comparison with the average financial position of his peers be of some comfort?
It turns out that people generally are sensitive to two dimensions of risk. First, there is the risk of absolute failure. In the financial domain generally, this is the risk of running out of money before you die. But equally important, there is the risk of relative failure, and this risk causes far greater anxiety. We can summarize the differences between the two types of risk from a financial perspective with the following matrix.