Professor John Grable has spent his career uncovering how investors’ feelings get in the way of making good decisions with their money. As a financial planner, he witnessed clients buy high and sell low, succumbing to their feelings instead of remaining dispassionate, objective and doing what is optimal. His research at the University of Georgia’s Financial Planning Lab combines clinical and experimental work to illuminate how our attitudes, preferences, emotions, cognition and physiology intertwine as we navigate the financial landscape.
Dr. Grable spoke at the 2015 Socionomics Summit on April 11 in Atlanta. Before the conference, Dr. Grable sat down with us to chat about his background and the upcoming event.
Socionomics Foundation: You spent much of your career as a financial planner and later moved back into research. What prompted that transition?
John Grable: I had a life-transforming event that drove me to the academic world. Prior to going back to work on my doctorate at Virginia Tech, I worked as a Certified Financial Planner practitioner. I was working with a married couple who wanted to plan for retirement. I met with them and used state-of-the-art models to rebalance their portfolio, taking into account their financial positions, attitudes, risk tolerance, time horizon and other important variables. Now, it just so happened that all of this started at the onset of a slide in the markets. In fact, the markets fell for nearly four months in a row. Each week, the wife would call me and ask what they should do. I answered that they should continue to implement the plan. The only thing that had changed was that the markets were a bit lower than when we started, but she and her husband were still in good shape since they had a longer-term investment horizon. Finally, near what we would soon learn was the bottom of the market, the wife became exasperated. She told me to liquidate the account and move to cash.
Of course, I did what she asked. But I admit to being totally confused. As a financial adviser, I did everything according to the rules of fiduciary investment planning and portfolio management. Yet this couple could not stand the pain of losses, even though earlier they indicated that they had a relatively robust level of risk tolerance. It was from this moment forward that I began a quest to better understand human attitudes and behavior in relation to personal and household finance.
SF: Do you think that your real-world experiences as a financial adviser helped you to diagnose the degree to which people’s feelings motivate their investment decisions?
John Grable: I think it is safe to say that nearly all financial advisers realize that a client’s mood when making a decision impacts their behavior. Advisers know this intuitively, but there was not much scholarly work done to support this hunch until the past 20 years or so. In fact, many of my economist friends still express skepticism that feelings impact anything beyond very short-term decisions. Studying the role of mood as a factor that might influence someone’s tolerance for risk fit well with my general research interests. In fact, my team of graduate students at the University of Georgia is still engaged in assessing feelings as a factor that impacts financial behavior.
SF: You write that the terms mood and emotion are often used interchangeably, but that they are distinct phenomena. Can you elaborate?
John Grable: An easy way to differentiate these two concepts is to think of emotions as shorter-term feelings about a particular event or circumstance. Emotions tend to be very reactive to some type of stimuli. Moods, on the other hand, are more free-floating. Someone’s mood is a generalized, non-specific state, so it is not necessarily directed at anything in particular. Anger, jealousy, fear and envy are emotions. Being generally happy or sad is an example of a mood.
SF: I understand that you are working on an approach called psychophysiological economics. What are this research area’s key characteristics?
John Grable: It is fairly well established in the psychological and behavioral finance literature that feelings influence behavior at both the individual and societal levels. Psychophysiological economics research aims at answering why this may be true. Psychophysiological economic theory presupposes that behavior and cognitive processing are indivisible and that the way people react to stressors shapes how they respond physically, mentally and behaviorally. It is a relatively new field of study. Rather than assess attitudes or behaviors separately, our research is showing that investors’ physiological reactions to factors around them play a significant role in their financial behavior. Basically, it looks like it is essential to measure attitudinal preferences, cognition, feelings and physical reactions in order to really understand, explain and predict economic behavior at the individual level.
SF: Finally, would you share a nugget from your upcoming Social Mood Conference presentation?
John Grable: I hope to share some surprising findings at this year’s conference. We have been tracking volatility in the stock market and matching volatility estimates to patterns of risk tolerance. It is probably not surprising that as stock market volatility increases, we are seeing shifts in risk tolerance. This makes sense if volatility is seen as an indicator of risk. What is most amazing is that the patterns associated with shifts in risk tolerance are not linear or consistent across demographic categories. In other words, reactions to volatility differ. Our initial conclusion is that volatility, as a measure of market sentiment, has different physiological effects on different investors. We are still working with the data, but I believe that conference attendees will be interested in the results. It is a very exciting time to be thinking about these types of issues.
SF: Thank you, Dr. Grable.