The discipline within economics known as behavioural finance continues to be important. The market dramas of recent years, ranging from failing banks to rising interest rates, create plenty of examples of behaviour to study and (hopefully) learn from. We talk to Barclays Private Bank.
Rising interest rates, turbulent markets, the demise of Silicon
Valley Bank, First Republic and Credit Suisse, and China as
a fresh
source of trouble – the drama keeps coming. These
nerve-testing changes don’t just influence what investors think,
but what they feel. And emotions and behavioural traits matter,
because they can lead humans into making big errors (and some
successes).
Behavioural finance, a topic that was relatively obscure within
mainstream finance two decades ago, has become more of a talking
point now. The term applies to understanding, for example, how
people mistake portfolio gains for pure skill rather than also
accept the role of chance or treat losses more emotionally than
they do with gains and follow crowd behaviour.
These insights draw on views about how humans have evolved from
pre-history and are used to explain events such as stock market
booms and busts or share trading frenzies such as the GameStop
affair in the US in 2021. In September 2020, a study of
more than 300 advisors by Charles Schwab Investment Management,
Cerulli Associates and the Investments & Wealth Institute,
found that 81 per cent of advisors used behavioural finance
techniques when talking to clients, rising from 71 per cent in
2019.
Behavioural finance practitioners in this area generally argue
that the more humans understand how they think, and how they can
be biased, paradoxically, the more rational their choices should
be. For example, a person who knows that they have a short temper
in certain situations might be more careful about avoiding those
situations; a person with an addictive personality might take
care to avoid getting into environments where temptations exist,
and so on.
Barclays’ move
A bank that jumped relatively early into behavioural finance is
Barclays. At the
private banking side, closely understanding what makes clients
tick is an important way to strengthen relationships, frame
expectations and deliver services, Alex Joshi, head of
Behavioural Finance at Barclays Private Bank, told this news
service recently.
“We are trying to get people to make better long-term decisions,”
he said.
Joshi recently discussed the outlook for behavioural finance –
Waiting for a tipping point – in the bank’s mid-year outlook.
When using the tools of behavioural finance, it is important for
clients and advisors to distinguish between short-term and
long-term goals.
“This is bringing a different perspective to discussions with
clients,” Joshi said.
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