A new UK-based business, launched by the former behavioural finance head of Barclays, aims to take insights from academia and turn them into actionable processes for wealth managers.

There are so many pressures on wealth managers to get a real feel for just how tolerant their clients are for risk that a strong understanding of behaviour is increasingly important. 

And with regulators cracking the whip to make sure clients are only put into services and products deemed “suitable”, being able to understand what makes clients tick and react to adverse or positive news is urgent. Market gyrations, meanwhile, create plenty of sobering lessons on how investors are not as rational or clear-headed about managing money as they would like to think.

The area of “behavioural finance” has come on leaps and bounds in recent years and Greg Davies, PhD, founder of London-based consultancy firm Centapse – which he has just launched – is a big reason why. Davies recently left Barclays, where he created then led the behavioural finance team for more than a decade. It is fair to say that if there was a discussion in the industry about this subject, there is a high chance Davies is at the table. The cutting-edge work he did in this area was often a proud point for Barclays, which sought to use the insights gained to glean the risk appetites and goals of clients.

Davies earned his doctorate in behavioural decision theory from Cambridge and he brings plenty of intellectual firepower to this area; he is also an associate fellow at Oxford’s Saïd Business School, a lecturer at Imperial College London, and author of Behavioral Investment Management. Among his other accomplishments, Davies created Open Outcry, a “reality opera” premiered in London in 2012, creating live performance from a functioning trading floor.
 

Oh behave
Behavioural finance, which seeks to uncover the motivations and habits of investors, going into, for example, the kind of behaviours humans carry from pre-history, has already seen considerable development as a field of enquiry. Today, however, the challenge is to take these insights and put them into effect for wealth advisors and clients. This is the core of what Davies now does. 

“We aim to be very much the practical applied side of behavioural finance,” he told this news service in a recent interview. Davies aims to blend his own knowledge of the discipline with quantitative models and use of data so that the insights of behavioural finance can be used to create real-life solutions for clients and help them make better decisions.

Centapse targets three main client groups: wealth and investment clients; professionals, and employers and employees. As far as clients are concerned, Centapse will, he said, help people to make smarter investment and wealth decisions. For professionals in the wealth industry, he wants to show how they can serve clients more effectively and stay on the right side of suitability requirements. Such professionals could be bankers, asset managers, investment committees or builders of quantitative models. In the final category of employees and employers, Centapse aims to improve how decisions inside organisations are made by understanding behavioural aspects of culture, conduct and compliance.

“I am not building a fintech company,” Davies said. Digital technology is only one part of the offering – in many cases, using the ideas of behavioural finance is about changing business processes and philosophy, and building effective client propositions and products.

Already, he has started on a project in the UK and one in the Middle East; there is also interest from companies in Scandinavia, Australia and South Africa. “We are not limiting our business to London,” he said, although his firm starts from the UK.

One of the reasons for interest in what he is doing, Davies said, is “a lot of organisations just don’t want to be left behind by the disruptive innovations we see currently. If you think about better decision-making then it is about making humans being more efficient about what they do." 

Humans can be poor at certain processes and in handling data and digital processing, while technology can free people up to focus on the kind of contact and advice they excel at, he said. Effectively combining data, technology, and behavioural design enables us to design "decision prosthetics" that help people to make more informed and better quality decisions, while reducing emotional biases.

There are developments, such as “gamification” and the approach of considering the full balance sheet of a client, where there is a need for a considerable amount of data, but also a need to truly understand human behaviours. Such holistic approaches are likely to work best if there is a clear understanding of the client and his or her behaviour, he said. (“Gamification”, according to one definition, uses engaging gaming mechanisms to modify how people behave, such as throwing different financial situations that a person might encounter in life to see what their reactions are.)

“This is about using behavioural finance in anger,” Davies said. “That is to truly improve decision-making in practice, rather than just superficial talk about decision-making biases. We will be developing this into a repeatable methodology and, over time, into technology solutions.”

One issue is that because a lot of firms feel they need to be seen to be up to date with the latest trends words such as “behavioural” are bandied about without the firms in question necessarily understanding them in detail or appreciating how to provide the best outcome for a client. Davies is very clear about making sure the term is used as accurately as possible. 

There is a long way to go before behaviours such as buying stocks at the height of a boom or selling assets at the bottom are fully tempered by some of the self-knowledge and practices that an understanding of behavioural finance can bring. If, however, some of the worst mistakes to which we fallible humans are prone can be constrained, then Davies’s clients will have reason to be grateful.