FINANCE





Many major banks are applying behavioral science to mitigate risk in the financial industry, with other financial institutions following suit to identify behavioral issues within their organization and understand employee behavior.


Of course behavioral science doesn't only apply to banks and bank employees, but also to the financial lives of everyday people. Here are some findings from Morningstar Behavioral Research (https://www.morningstar.com/company/behavioralinsights) regarding the financial impact of behavioral biases:


1. Most Americans demonstrate present bias, loss aversion, overconfidence, and base rate neglect. This finding is valid at some level across all age, income, and education groups.


2. On average, younger people as a group had a higher tendency to demonstrate overconfidence compared with older individuals.


3. Higher levels of bias directly correlate with worse financial outcomes. This is seen in various domains, including: financial health, checking and 401(k) account balances, and self-reported credit scores. Such results remain the same even when controlling for factors like income, education, and financial literacy.


4. Higher levels of bias directly correlate with determinantal financial behaviors, such as not planning ahead or saving and investing.


5. By and large, no gender is more biased than the other.


6. The good news: individuals and their advisors can employ various techniques to help combat these biases, therefore mitigating the negative effects on financial health and wealth. Some techniques include: slowing down the decision-making process by setting up decision "speed bumps" that help us avoid impulsive decision-making, setting fixed objective trading rules, ignoring the daily news and short-term price movements.



The role of behavioral science in finance can be so vast that there is a sub-field of behavioral economics, called behavioral finance.


Check out the video below if you're interested in hearing directly from Steve Wendel - Head of Behavioral Science at Morningstar.