Mind the (behaviour) gap

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A gap exists between intentions and behaviour in investing, just as it does in other aspects of our lives. This gap results in sub-optimal investment performance but research suggests that the behavioural biases and other obstacles that create these gaps are neither inevitable nor irresolvable.

Investment researcher Morningstar has measured the behaviour gap by comparing the performance of average fund returns with the actual returns of investors in those funds.

The average return of the international equity funds in Morningstar’s research database was 8.8 per cent a year over the 10 years to 2013. Over the same period the average return of investors in those funds was 5.8 per cent a year.

The gap occurs when people become anxious about markets and withdraw funds, fail to take advantage of opportunities or procrastinate about implementing their plans.

Morningstar found that the same holds true in bond markets. The average bond fund return over the 10-year period was 5.5 per cent a year, while the average return for investors in those funds was 3.2 per cent.

James Louw, the head of advice and investment solutions at Morningstar Investment Management, says the group has formed a team to work on strategies that advisers can use to “coach” their clients to help overcome their behavioural biases.

Morningstar’s analysis is backed by academic research. In 2016, two psychologists, Paschal Sheeran of the University of North Carolina and Thomas Webb of the University of Sheffield, published meta-analysis of 422 previous studies of what they call the “intention-behaviour gap”.

Sheeran and Webb argue that the factors leading to the discrepacies between intentions and behaviour are neither inevitable nor irresolvable.

According to their paper, most behavior is habitual or involves responses that are triggered by situational cues. But achieving long-term goals requires us to have intentions.

“Health, educational, organisational and financial outcomes generally rely on frameworks that construe intentions as a key determinant of action,” they say.

Forming an intention to change is vital if people are to initiate new behaviours or to alter courses of action.

“However, changing intentions does not guarantee behaviour change. There is a discrepancy between intentions and behavior. There is an intention-behaviour gap,” they say.

The gap exists because many intentions present a conflict between what people want to do and what they feel they should do. Such conflicts can give rise to justifications for indulgence that can undermine the realisation of intentions.

The research shows that key problems in getting started include forgetting to act, missing opportunities to act and failing to engage in preparatory behaviours. Many goals involve a series of actions that need to be completed in sequence

“Failing to capitalise on favourable conditions for acting seems especially likely when such conditions are brief or infrequent, involve deadlines, or when multiple means to achieve the goal are available and the person is undecided about how best to attain their goal,” Sheeran and Webb say.

So, having initiated “goal pursuit”, the next self-regulatory problem that people face is how to keep goal pursuit on track. One reason that goal pursuit can be derailed is because people fail to monitor their progress. Keeping track of progress increases the likelihood that intentions are achieved.

The research shows that people start out with good intentions but over time few people monitor their household energy consumption, check their bank balances or keep track of what they are eating.

Making good progress towards one’s goal can lead to coasting and people may withdraw effort from goal striving prematurely.

One of the most widely researched and best-validated tools for improving the translation of intentions into action is forming if-then plans, which link goals with opportunities and obstacles, and establish responses if an obstacle or opportunity arises.

“If-then plans help people to act because the mental representation of opportunities and obstacles becomes highly accessible,” they say.

Monitoring goal progress is a key step between intention formation and goal attainment. Increases in the frequency of progress monitoring leads to behavior change.

And the research shows that specific goals engender better performance than general goals.

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