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Finance in Focus: What is behavioral finance?

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Finance in Focus: What is behavioral finance?

Overview

Behavioral science applied to financial investing sounds like rocket science to many of us; however, it is a field studied by many financial firms. Behavioral science explores the activities and interactions among humans and their surroundings. This area of science emerged in the mid-1980s when Richard Thaler challenged traditional economists' beliefs that investors make rational and efficient financial decisions by arguing that investors act under the influence of behavioral biases often leading to decidedly less than optimal decisions.

As discussed in a recent podcast, technology based on analytics and cognitive computing can help manage financial advisors and clients by avoiding the threat of being overrun by these personal behavioral biases. In this podcast, listen to two behavior finance experts discuss the benefit of marrying behavioral science and financial investing along with several other experts who participate in this discussion: 

  • Hugh Massie is a behavioral finance strategist and CEO at DNA Behavior International, which helps investors, advisors and leaders to behavioralize money. Massie has more than 60,000 hours of experience guiding millions of investors with assets of $1 to more than $1 billion and leaders of more than 2,500 businesses in 123 countries to be behaviorally smart for achieving greater financial empowerment. He pioneered the development of Financial DNA, the world’s first behavioral fintech platform to provide validated financial personality insights based on extensive behavioral finance research. Learn more at www.behaviorallysmart.com and www.financialdna.com.
  • Victor Ricciardi is an assistant professor of financial management at Goucher College in Baltimore, Maryland. Ricciardi teaches courses in financial planning, investments, corporate finance, behavioral finance and the psychology of money. He is a leading expert on the academic literature and emerging research issues in behavioral finance and is the editor of several e-journals distributed by the Social Science Research Network (SSRN), including behavioral finance, financial history, behavioral economics and behavioral accounting. He began his professional career in New York City as an international portfolio accountant at Alliance Capital Management and a mutual fund accountant for Dreyfus Corporation. Check out Ricciardi’s latest book, Investor Behavior: the Psychology of Financial Planning and Investing.
  • Alex Baghdjian is a senior offering associate for financial markets and wealth management at IBM. Baghdjian brings deep knowledge of the financial services industry, particularly financial markets and wealth management. His professional experience revolves around digital wealth management, securities-based lending, mortgage processes, account opening and client segmentation strategy. In his role as a senior offering associate at IBM, he focuses on bringing IBM cognitive and analytics solutions to the financial services industry.
  • Rob Stanich is a finance expert and global wealth management offering manager at IBM who brings extensive experience in financial markets and wealth management. Stanich has nearly 20 years of experience in the industry, including 19 years on Wall Street—13 of them as an IBM employee.
  • Brian Walter is a cognitive expert and the global industry lead for IBM Watson financial services at IBM. Walter has been with IBM for more than 10 years and serves as the global industry leadership partner and wealth management lead for banking and financial services within the Watson Group. He brings extensive knowledge in the financial services industry, having founded, grown and sold three businesses that provided services in the financial markets area before joining IBM. 

The discussion reveals several fascinating insights: 

  • Why Ricciardi believes that over a 30-year period, investors leave 7.5 percent on the table annually by ignoring emotional biases
  • How an advisor's relationship with an investor can help the investor find solutions that fit the investor’s goals and avoid the problems caused by biases
  • What the investor’s emotions are and when they come out
  • How financial education is correlated with investor behavior
  • How financial therapy such as games or personal antidotes are used to combat biased behavior
  • Why connecting financial decisions to a personal goal can improve overall financial outcomes
  • How cognitive computing can bring precision that is improved by a feedback loop to financial decision-making 

The wealth management industry is in the midst of significant changes, and behavior science leads some of those changes. To help financial advisors deliver personalized offers and capture the next generation of wealth, IBM Wealth Management solutions powered by analytics and cognitive computing help financial firms leverage client insights to improve service, retention and profitability. And learn more by watching a demo on IBM Client Insight for Wealth Management Powered by Watson.