3 Behavioral Biases That Hurt Investors: Daniel Crosby

1. Overconfidence or ego: People are especially more positive as a defense factor, he said, especially men, who when surveyed, thought themselves friendlier, funnier and better looking than average. Crosby said the researchers concluded that "the average man seems to think he is two sit-ups away from dating a supermodel."

Ways investment advisors could deal with this include diversification within and between asset classes, building strong arguments, determining what usually happens and applying it to reality, and finding out what's likely to be the weak link.

2. Conservatism: Typically we stick with what we what we know. "We have a tendency to stay with what's worked in past," Crosby said. "If I know what to expect, it will hurt less."

How advisors can apply this: Buy what you don't know, don't know what you own, and procrastinate a little — e.g. people who sleep on a decision usually moved forward. Typically, he said, we overlook the powerful solutions because we look for the complicated solution.

"People try to game the system," Crosby said. "But we need to put probability first."

3. Emotion: People tend not to ask the sophisticated question. "We don't ask if something is risky, but rather, is it fun?" He recommends overcoming emotion though meditation, or actually using emotion in a positive way.

He says that clients expect the advisor of the future to have a high IQ or at least be competent, have a good bedside manner, be able to customize portfolios, have access through technology, be able to communicate one-on-one, and most of all, give them peace of mind.

— Related on ThinkAdvisor:

• 'Buy What You Know' Is 'Dumb Advice': Daniel Crosby
• Fighting Investor Bias Through Portfolio Design