Behavioral analysis and management in finance
When it comes to pitching to investors, it’s always more interesting to wait for their decisions.
Behavioral analysis and management applied to finance are used to study the behavior of investors in order to know in advance what decision to make.
This article invites you to explore the functions and challenges of behavior analysis and management in finance.
What are the tools of behavior analysis and management in finance?
Behavioral analysis applied to finance allows us to study the trends of investors in order to better control their profile. This approach makes it possible to know more precisely the investor’s behavior and investment expectations.
Banks and other lenders typically use this approach to determine which investors are worthy of project financing. As a result, certain psychological tools of behavior analysis and management are implemented to achieve this knowledge of investors. Dynamic questionnaires are generally designed to gain a better understanding of a customer’s relationship to risk.
The questions are aimed at getting more information about investors’ financial knowledge. When faced with investors who have little knowledge in this field, they are required to be interviewed to understand the concept of finance.
Thus, the tools used in behavioral analysis and management in finance are the assessment of the client’s attitude to risk, the understanding of the financial mechanism, as well as the sale of environmental, social and governance (ESG) products.
It is about asking questions that allow you to analyze the risk-taking ability of customers to assess their relationship with risk. The answers will then be used to better define the investor profile. Customers also need to understand the financial mechanism, as most of them do not have knowledge in this area.
This is certainly one of the reasons why these investors find it difficult to invest more. Therefore, improving their financial knowledge will be a real incentive.
Ultimately, selling ESG products will determine whether a customer is interested in responsible finance. By offering them ESG products, it is easy to know their connection with the environment.
What are the cognitive biases of behavior analysis and management?
Investors, banks and lenders generally resort to cognitive biases to know their trends. These are elements that ensure that an individual gives different importance to facts of the same nature.
Clearly, cognitive biases are nothing more than a set of behaviors that can cause investors to make irrational investment decisions.
Therefore, the bank or credit institution is obliged to explain the financial transaction before accepting any loan document from the investor. This allows the latter to break away from cognitive biases a little more easily to make the best decisions for their project.
Thus, there are cognitive biases in financial behavior analysis and management that will allow the investor to confirm his views. Thus, he can abandon the third-person point of view and adapt to his own. There is also hindsight bias, which corresponds to the fact that the investor is persuaded to know the future of his investment. Finally, there is a mental foundation that teaches you to trust your intuition.
What are the emotional biases in decision making?
When making an investment decision, there are various factors to consider. Emotional bias is one of the factors that help banks learn the profile of an investor better.
It really happens that the investor cannot control his emotions and in this case he can quickly make bad decisions. He generally thinks that he has all the information and tends to strongly reject the opinions of others. Behavioral analysis and management should be used to better understand the mindset of investors.
Emotional biases are many and varied, and one of the most common is the herd instinct. It involves systematically imitating the behavior of others, imagining that it is good. This is bad reasoning that can have serious consequences for the investment.
Another emotional bias we’ve found is the status quo, which is enforced by fear of stepping out of one’s comfort zone. Some investors are unaware of this, but weather conditions can help investors make decisions. Thus, many studies have highlighted that the investment market rises on sunny days. As a result, good weather is an emotional factor that drives an investor to buy it, unlike earlier in the week when sentiment was flat.