Behavioural Finance: finance from a more human perspective

A series of conferences on financial markets and investment banking .
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Behavioural finance: finance from a more human perspective
21 febrero 2022
El pasado 31 de enero, tuvo lugar en el Centro de Estudios Garrigues la primera conferencia dentro del Ciclo de Conferencias del área de Mercados Financieros y Banca privada en la cual se debatió sobre la relevancia imparable que las ciencias del comportamiento están teniendo en la economía en general y en las finanzas en particular.

On 31 January, Centro de Estudios Garrigues hosted the first in the series of conferences on financial markets and private banking. This inaugural conference examined the growing importance of behavioural sciences for the economy in general and for finance in particular.

The first in the series of conferences on financial markets and private banking scheduled for the 2021/22 academic year was entitled ‘Behavioural finance: finance from a more human perspective’. Organised within the framework of the master’s degrees and executive programmes in the area of finance at Centro de Estudios Garrigues, the conference was held on 31 January. The keynote speaker was Diego Valero Carreras, chairman of Novaster, who explained the role that behavioural sciences are playing in the area of economics and finance.

Behavioural economics helps us to have a more human vision of finance, because it focuses on people’s behaviour, perceptions, and emotions, rather than on financial products. It is the financial products that need to adapt to people so that they can make decisions that are useful to them.

In this sense, financial health takes on an important role, as it refers to people’s capacity to meet their financial obligations, have peace of mind about the future, and be able to make reasonable financial decisions.

Financial health objectives can be framed within a matrix of six key elements for good financial outcomes: day-to-day management, emergency funds, short-term goals, protection, long-term goals, and anticipation of goals.

Reaching reasonable levels of financial health entails working on behavioural change — and that is where behavioural economics comes in, with different models and methodologies for achieving good habits in essentially emotional environments. People have biases (i.e. deviations from the norm) that are caused either by ignorance (cognitive biases) or by personal valuations (emotional biases). Addressing these biases with behavioural change models is critical to improving financial health.

Some of the tools used in the field of behavioural economics are decision architecture, which is how we design mechanisms to enable people to make good decisions more easily; and nudging, which is how we can change certain behaviours with small, cost-effective prompts.

These tools distinguish between heuristics, or the mental shortcuts our brains use; and biases, or the errors that arise from the use of heuristics.

Understanding the basics of behavioural economics is essential for understanding behavioural finance, which leads us to a different perspective from that of classical finance. In classical finance, client profiling processes do not take into account the psychographic characteristics of the investor. Instead, based on rather generic tests, clients are profiled as moderate, conservative, or aggressive — which studies show is often highly correlated with the profile of the manager conducting the tests. Behavioural finance also analyses people’s emotional and cognitive biases, and understands that these biases vary over time, sometimes very suddenly.

If we are to have a human, personalised, interpretative, and guided relationship with finance, we need behavioural counselling — or financial coaching. A coach works on converting investors’ dreams into financial goals and accompanies them with permanent support, understanding their emotions and perceptions. This approach makes it possible to improve people’s financial health and enables us to accomplish difficult tasks, like building up savings. It is a matter of working on habits, paving the way, and providing support both in the phases leading up to and especially after the decision making.

Behavioural sciences provide us with the methodology to understand and interpret the mechanisms activated in our brains when making decisions, and therefore allow us to act to ensure that those decisions are beneficial to us.

Thank you to all who participated in this session.

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