Behavioural Science
Financial Partners uses Behavioural Science to not only help better understand our client’s propensity for risk and loss, but also how they are likely to react when anxious/under stress. This is a more comprehensive approach than that taken by the majority of other Independent Financial Advisers*
Behavioural economics and prospect theory shows us that when people are feeling anxious about losing money, such as during a bear market, loss aversion ceases to become ‘a’ factor in their decision making and starts to become ‘the’ factor.
It’s at these points that a person’s risk appetite can appear to suddenly change. In reality, their risk personality has not changed at all, but one aspect of it has become dominant: Loss aversion.
Putting it another way, a client who’s okay taking risk so long as they don’t lose any money!! Our risk profiling process identifies such clients, whose likely behaviours may be most at odds with how they see themselves, and adjusts their risk score accordingly.
This Behavioural Risk process was developed off the back of research conducted by leading academics in the fields of financial-risk decision making and behavioural psychology. It combines elements of both validated psychometrics and predictive behavioural lotteries based on Prospect Theory. Leveraging the strengths of one approach to mitigate the inherent weaknesses of the other.
Gamification
Adding game-like elements to encourage participation.
The tests (provided by an external company) have been, and continue to be, validated through both extensive research and the real world data of our client institutions and advice firms.
Psychometric risk questionnaires are a proven and valid means of risk profiling, however risk decision making is complex, comprising a myriad of factors that can influence a subject’s profile. These include beliefs, loss aversion, composure (itself dependent on a number of factors) - even the subject’s DNA, along with many, many more.
Hence, many elements of our process are “gamified” and all of it is interactive. Gamification is deployed with our behavioural modules because, as a huge body of independent academic study has shown, behavioural measures acquired using gamified assessments can reflect behaviours more accurately than questionnaires. Not to mention it being shorter and far less dull!
Better Outcomes
Different clients need different forms and frequency of support. Our process reveals the propensity of a client to diverge from their risk attitude when they’re anxious, and even those clients more likely to be influenced through media and peers rather than facts.
This enables different clients to be advised based on their likely support need; understanding who might need more support and when. Enabling targeted contact for better client outcomes.
*Most UK risk profiling techniques utilise “Psychometric” (statistical) measures. Whilst Financial Partner’s outsourced risk profile partner also uses this measure, uniquely they also combine this with “Revealed Preferences” (individualistic) as a measure - effectively utilising two sciences rather than just one.
