Key points
- Personal finance is behavioural finance.
- Blending behavioural psychology with quantitative-finance theory employs the best of both human and algorithmic worlds. Humans concentrate on what they're best at – empathy, values, conversation, navigating ambiguity, creating an environment for making comfortable and confident choices – while machines take on information-filtering, monitoring, and data-processing.
- There is nothing rational about offering a theoretically perfect solution in the knowledge that, as an imperfect human, the investor will fail to last the distance. The rational path is to provide an accurate scientific diagnosis of the best strategy each investor can stomach, and then offer an appropriate prescription.
A digital helping hand
In high-stakes decision-making environments, humans need help. In healthcare, doctors leverage data-processing technology to supercharge the diagnostic process. In sport, coaches aided by algorithms tailor training to each athlete's unique capacities.
With the right data, the right design and the right digital support, decisions can be made both more efficiently and more effectively. Doctors still call the shots and manage their patients, but diagnostic decision-support tools help focus their aim and fine-tune their relationship with the patient.
Making better personal financial decisions is no different.
Personal finance is behavioural finance, and behaviours are complex. Helping investors find the right destination, the best path to get there, and managing their behaviour along the way, is hard. There are many moving parts. And while it may be clear that the message received by a client is not always the same as the one sent, the case-by-case consequences of this are not. One client's medicine is another's poison; what may dampen one client's anxiety may ignite another's.
Oxford Risk's decision-support software moves behavioural finance from the fringe to the core of decision-making systems. It goes beyond nudging and one-size-fits-all answers to using decision prosthetics – tools that guide humans towards engaged choice and personalised prescriptions, that more consistently make both advisers and clients the best versions of themselves. Our diagnostic tools are designed to be integral to the investment process: built-in rather than bolted on.
Blending behavioural psychology with quantitative-finance theory employs the best of both human and algorithmic worlds. Humans concentrate on what they're best at – empathy, values, conversation, navigating ambiguity, creating an environment for making comfortable and confident choices – while machines take on information-filtering, monitoring, and data-processing. Machines don't make the decisions, they just make the decisions better. Gut instincts need to be both trusted and verified.
Good investing outcomes are not achieved by merely “optimising” risk-adjusted returns. People invest in narratives, not numbers. Instead, advisers need to diagnose each investor's recipe for emotional comfort, and proactively secure it ahead of the journey in a planned, personalised, precise and low-cost way. This maximises the real-life returns that investors actually care about: the anxiety-adjusted returns that account for the emotional costs of ownership.
There is nothing rational about offering a theoretically perfect solution in the knowledge that, as an imperfect human, the investor will fail to last the distance. The rational path is to provide an accurate scientific diagnosis of the best strategy each investor can stomach, and then offer an appropriate prescription, be it changes to the portfolio, to its presentation, or to the decision-making process and interactions that define the adviser-client relationship.
By using Oxford Risk's behavioural profiling to establish each investor's financial personality on up to 15 stable dimensions, embedded in our algorithmically-assisted diagnostic process and decision tools, we can determine likely causes of emotional discomfort, pinpoint preventative measures, and then deliberately aim to deliver them in a cost-effective way. Addressing investors' emotional needs ensures better outcomes, more consistent advice, and happier clients.
Originally published in Business Reporter on 6/1/2020.
