Category: Behavioural Finance

10 Results Shown

Robo Advice – Engaging the consumer

Financial planning can often be a very stressful and confusing experience. Exploring and deciphering numerous different investment options and strategies in order to target specific future financial goals is not a process which many people tackle with relish, if at all. Nevertheless, an ageing population, escalating student debt, rising house prices, not to mention the introduction of pension freedoms, mean that many more consumers will now face important and irreversible decisions about their finances, in some cases, for the first time in their lives. A growing need, therefore, exists for robust financial advice to be made more readily acces ...


Behavioural Finance – The influence the Affect Heuristic

What is the Affect Heuristic? The affect heuristic is a mental shortcut that helps individuals make decisions quickly based on the way they feel (their “affect”) about a particular situation. According to the latest research, if you have positive feelings about a certain activity then you are more likely to see the benefits of it as high and th ...

Behavioural Finance – Conformity bias

Why are we affected by the conformity bias? There are two main reasons why a person’s opinion is often influenced by those of others. The first is the social pressure of conformity which can be a powerful force. As social creatures, we all want to be accepted by others and following the behaviour of the group is an ideal way of achieving this. Th ...

Behavioural Finance – Combating risk illiteracy

Innumeracy The biggest single hindrance to consumers in getting to grips with their own finances is a lack of basic numeracy skills. Often the capability to add, subtract and understand probabilities is taken for granted by the financial services industry but for many thousands of men and women around the UK, these mathematical processes do not com ...

Behavioural Finance – The power of the anchoring effect

Knowing that your host prefers white wine, and wanting to make a good impression, you start looking at the more expensive wines and spot a cheeky little Sancerre priced at £22. Thinking this may be too much to spend on one bottle you decide to look elsewhere but then notice that this wine is reduced to £12 for today only! Although this is still m ...

Behavioural Finance – The impact of Relative Framing

For example, if a bottle of mayonnaise is described as being 80% fat free then we may be more inclined to choose it than if it was labelled as containing 20% fat, even though the two descriptions are equivalent. The Framing effect The trouble is that framing impacts our understanding in ways that we are not always aware of. For instance, if a probl ...

Why good member communications are key

Not only are they able to take up to 25% of their pension pot as a tax free lump sum, they also have three main choices for the balance of their pension at retirement: Withdraw the whole of their pension at retirement (subject to income tax) Purchase an annuity Make use of income drawdown. But making such decisions is far from straightforward for m ...

Behavioural Finance – Helping consumers with Regret Avoidance

Instead, they choose to ignore the issue in order to avoid the unpleasant feelings that arise from facing the outcome of such decisions. Psychologists generally put this tendency of regret avoidance down to what is described as ‘cognitive dissonance’. But what exactly does this mean? Cognitive dissonance Cognitive dissonance is often defined as ...

Behavioural Finance – The effect of the Availability Heuristic

Put simply, a heuristic is a term for a mental shortcut that helps us make judgments and choices. Without such shortcuts we could well end up spending an inordinate amount of time weighing up and analysing each decision we make, leaving us little time to act upon our choices. The Availability Heuristic This bias describes our tendency to assess the ...

Behavioural finance – Understanding the science behind our investment choices

However, these days, that notion has largely been set aside in favour of a more evidence-based assessment that suggests we are, in fact, rather more irrational, community or family-oriented and not terribly disciplined when it comes to decision making. For example, how many of us continue to play the lottery every week even though we know that the ...