Wealth Strategies

Inflation, Rising Rates Put Behavioural Finance In The Frame

Tom Burroughes Group Editor 25 August 2023

Inflation, Rising Rates Put Behavioural Finance In The Frame

Joshi became interested in the subject after reading “Predictably Irrational” by Dan Ariely whilst preparing for his admission interview for Cambridge University. He later joined Barclays in September 2017 and now works with colleagues to embed behavioural finance into the banking and advisory process.

"Many of the things that exist in behavioural finance are not rocket science and are quite well understood, but we don’t always act on them,” Joshi said, responding to a question of how well clients understood the topic and how they reacted to ideas on it.

Behavioural finance helps clients, with their advisors, to put rules in place to guide how they act in different market situations, right down to the idea of avoiding reading the news feeds for a few days to stay composed. 

Artificial intelligence, meanwhile, can play in the behavioural finance space through its presumed ability to spot patterns in a mass of data, he said. “AI could benefit advisors if it allowed for more personalised and reactive communication.” However, caution is advisable because so much revolves around trust: “The human element is key.” 

Related to AI is the impact of technology on investing, and how behavioural finance plays into this. Joshi explained: “Technology has been highly beneficial in democratising investing. However, certain features such as the ability to check on investments and transact in real time at any time is not without risks. The ‘gamification’ of investing and trading, and the social media element can exacerbate certain biases or unhelpful behaviours.”

Ultimately, wealth management is a results business, and a world beset by inflation and changing market conditions reinforces that. “In the face of today’s uncertain world, we remind investors of the importance of staying focussed on their own goals. Using that as the lens through which to view the news and their own resulting actions allows investors to look beyond the headlines at the impact on their own individual portfolios. For the long-term investor holding a diversified portfolio, it’s longer-term data and trends which matter most.” 

Clients have been able to see clear benefits from applying behavioural finance ideas, Joshi said: “Clients begin to identify their own biases and behaviours, leading to conversations about how to better approach the investing journey to maximise their chances of reaching their own individual investment goals, as well as improving satisfaction with their investment journey.” 

Academic behavioural finance studies have looked at the impact of various biases on investment performance, for example in the paper on overtrading – "Trading is hazardous to your wealth," Barber and Odean (2000). 

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