On Monday, I talked about  ideas that came up in a conversation with Duke's Dan Ariely, author of Predicably Irrational.

Today I continue to focus on some of Ariely's research; this is drawn from a column by Bob Huebscher, publisher of US advisor website Advisor Perspectives, based on a talk Ariely delivered at a recent US conference.

The downside of owning an idea

Ariely also talks about the distortions that come from taking ownership of an idea.

The basic idea is that ownership changes our perspective, which applies to both material things as well as points of view.

One principle involved is that the more work you put into something, the more ownership you             begin to feel for it. He talks from personal experience about the fact that pride of ownership is directly proportional to the ease with which I've been able to assemble furniture.

Ariely has a term for this: the "IKEA effect."

Once we take ownership of an idea - whether it's related to politics or sports or investing - a lot of changes take place.

We probably fall in love with the idea more than we should. We value it for more than it's worth. And quite often, we have trouble letting go of it because we can't stand the idea of its loss. What are you left with then? A rigid and unyielding ideology that can be quite detrimental to clear thought.

What advisors can do:

It turns out emotions are fleeting, so one response could be to figure out how to impose a delay between the time clients feel something and the time they act on it. Waiting even a day or two from the time that clients feel an impulse to act can reduce the impact of their emotional response.

Being aware of anchoring

There's also something called anchoring, where people make decisions in the context of past experience, even if that past experience is of limited relevance.

The price at which they bought a stock is very vivid in clients' minds, but in reality they'd be much better off if immediately after the purchase they forgot the price they paid.

Investors also ascribe importance to 52-week highs and lows, but why that? It would make as much sense to look at the highs and lows over 70 weeks, or 40 weeks.

Another danger of anchoring is that it can cause regret, which usually isn't very useful in decision-making.

For example, a client refuses to buy a stock or fund at $30 because they originally looked into it at $20 and didn't buy. Buying at $30 will make them regret even more that they missed it at $20, so they won't buy it.

What advisors can do:           

With investing, focusing on what's already happened is generally a bad strategy.

To the extent possible, the decision at any point should be only about looking forward. Just adjusting how you set up spreadsheets and what you track on reports could help clients in this regard.

Understand your own biases

It's not just ordinary consumers who are irrational - professionals are as well.

An experiment with a group of Canadian doctors demonstrated this.

One group was asked to imagine that they had recommended a patient for a hip replacement - but the week before the surgery, they discovered they had failed to try a low risk medication that might make the surgery unnecessary. The majority said they would postpone the surgery to try this treatment.

A second group of doctors was asked to imagine that it was not one but rather two different types of medications that had been missed. This second group was substantially more likely to go ahead with the surgery, even though the chances of finding an alternative had gone up.

"The more complicated the decision" Ariely says "the more likely we are to revert to simplistic, default options. Quite simply, the brain is not wired for complex decision making."

Closing words for advisors

"Advisors aren't just impartial observers who allow people to express their preferences,"

Ariely says. "You have a huge influence, through the questions you ask, and a huge

moral burden to get clients to think about choices in the right terms."

Ariely has a few key points of advice for advisors.

-       The advisor's role is to guide decisions, and to understand what your clients can and cannot compute.

-       Be wary of the curse of knowledge: When you know something well, there is a tendency to assume others know subjects as well as you do.

-       Think carefully about choice architecture, defaults, and decoys.

-        Remember that emotions are a powerful force in short-term thinking.

-       Most important, never forget that clients are irrational, and your job is to protect them from that irrationality.