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Investors pay a high price for emotional decisions

New European research from behavioural finance experts Oxford Risk reveals that over 73% of wealth managers believe emotional decision-making costs investors investment returns.

63% of wealth managers believe making emotionally driven decisions costs investors over 100 basis points of investible wealth annually

New European research [1] from behavioural finance experts Oxford Risk reveals that over 73% of wealth managers believe emotional decision-making costs investors investment returns.

Its study with wealth managers across Europe who collectively manage assets of around €327 billion, found that nearly two-thirds (63%) believe emotional decision-making costs the average investor over 100 basis points of investible wealth each year. Around 15% believe the cost is over 200 basis points on an annual basis.

Of wealth managers questioned in the UK, France, Italy, Spain, and Ireland, 65% said their clients frequently make investment decisions based on their emotions, compared to just 11% whose clients don’t do this. One in four (25%) were neutral on the issue.

Worryingly, given the huge financial impact that emotional decision-making can have on clients’ investments, only three-quarters (75%) of wealth managers surveyed see one of their key roles as helping their clients manage their emotions when making investment decisions. 3% don’t believe this is part of their role, and 21% are neutral about whether it is or not.

Oxford Risk builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases. However, it says that many wealth managers and financial advisors aren’t properly equipped to help clients with the emotion of recent events – the financial impact of covid-19, rising inflation and high levels of volatility – all of which have impacted their investments.

Greg B Davies, PhD, Head of Behavioural Finance, Oxford Risk said: “Recent global events affect all investors and we know common behaviours and anxieties surface during times of crisis. Investors are likely to focus too much on the present and on the detail, and despite their better judgement many feel compelled to do something. Often that ‘something’ leads to underinvestment, selling low, or decreased diversification – and as our new research shows, it can cost them dearly.

“Managing the investor is just as, if not more, important as managing the investments themselves. A carefully composed portfolio management strategy can be undone very swiftly if behavioural traits provoke the wrong actions. It’s vital that wealth managers not only understand this and their important role in achieving this, but are equipped with the right tools to effectively do so.”

Oxford Risk’s behavioural tools assess financial personality and preferences as well as changes in investors’ financial situations and, supplemented with other behavioural information and demographics, build a comprehensive profile. Oxford Risk’s financial personality tests can measure up to 20 distinct dimensions, of which six reflect preferences for ESG investing.

It believes the best investment solution for each investor needs to be anchored on stable and accurate measures of risk tolerance. Behavioural profiling then provides an opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for the anxiety that is likely to arise. This should be used to help investors control their emotions, not define the suitable risk of the portfolio itself.

Next Finance , December 2022


[1] Independent research company PureProfile interviewed 150 wealth managers in the UK, France, Italy, Spain, and Ireland during September 2022

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