Good Piece on Behavioral Finance and Cognitive Challenges

We just found this article on behavioral economics and financial decisions from Australia.  

It is long and complicated but lays out the significant challenges from the investor side of the equation.  Remember, that all advisors bring the same cognitive challenges and tendencies to their work. 

We propose that financial services offerings, products and fee structures and institutions have been “caused” and shaped by these brain factors.  There is literally no way to challenge or go against them.  They were set by evolution millions of years ago and are also found in mammals and other primate brains.

As marketers, we work hard to moderate these cognitive hurdles.   In addition, “normal” aging and stress accelerate and worsen cognitive challenges.  Men earlier than woman.  Here are some highlights:

“Many aspects of observed human decision-making differ from the ‘rational’ behavior assumed in economic models. For example:
•   People are much more concerned about possible losses than possible gains
•   People are inclined to stick with the status quo
•   People dislike uncertainty
•   People value fairness
•   People sharply discount the future compared to the present

For all but the simplest of decisions, people generally do not attempt to find the optimal solution, but rather apply simple decision-making strategies:
•   They stick with what they know
•   They follow others
•   They settle for something that is good enough, rather than searching for the best

The more complex the decision, the less well equipped people are to deal with it. As a result, people often make decisions which do not appear to be in their best interests.”

Whew!  Complicated.  The brain factors will likely be understood soon.  However, the global financial system is morphing at an accelerating pace.  THAT’S stochastic, fractal and completely unpredictable.