Focus on clients’ positive financial behavior

"Over the last 15 to 20 years, we've seen a movement in clinical psychology to study positive psychology, and that's what we need in behavioral finance," he said. "We have to speak to the other side of the coin, as it were, to make investors aware of the good things that they do and to draw attention to the positive hallmarks of investor performance."

To make sure that that happens effectively, advisors should get clients to focus entirely on themselves and their lifetime goals in order to simplify the investment process. Advisors need to help their clients set up personal benchmarks and focus only on them; only then will they be able to help them both exhibit and feel encouraged by the more positive aspects of their investment behavior.

"There are thousands of pieces of economic data out there, and what happens is that people focus on those and how they are likely to impact their financial performance," Crosby said. "People worry about the performance of the Cypriot economy, to give a recent example, but the reality is that the performance of the Cypriot economy is really not that germane to their lives or to their situation."

When investors react to a large, external event like a downturn of the economy of Cyprus, they will definitely exhibit the negative behaviors chronicled by behavioral finance, but if advisors can get their clients to look instead at the benchmarks they have set up to accomplish in their own personal financial agenda — sending a child to college, for example — then they will be able to get them to see positive financial behavior that will ultimately encourage them more for the future, Crosby said.

"We know that people will be loss averse, for example, because behavioral finance has documented this very well. It is not enough for an advisor to tell their clients that they are loss averse because this is like saying 'stop eating cookies' without offering any alternative," he said.

Crosby is currently working with several advisory firms to come up with programs that will help their clients focus on working toward and achieving personal benchmarks in order to highlight more positive behavioral tendencies that will ultimately help them be better investors.