Speaker 0:
Hello and welcome to this behavioural finance round table. I'm joined today by Paul Nixon, head of behavioural finance at Momentum Investments. Sharon Mola, financial planning coach at Old Mutual World as well as Niko Kaza, head of portfolio solutions at Welcome to You all.

Speaker 0:
So, Sharon, I'm gonna kick off with you. Why do various individuals perceive risk differently when it comes to savings or their finances and investments? And how does this relate to their relationship with money so clients will perceive risk differently because they have a different relationship with money? So it's, it's You have to look at your relationship with all things in life you have a relationship with with everything. So how we use gadgets around us, you know, the relationship that we have with others, how we relate to ourselves

Speaker 0:
and depending on what's going on there that will determine the kinds of relationships we might have with investing or with saving, um, or with yeah, with with anything really OK. Thank you, Sharon. Paul. So what have you perceived? Um, have been individuals, different relationships when it comes to managing their finances. Yes. So there's a couple of ways you could look at this. Um, Chloe, So you know, if we if we think about why people or how people perceive different risks, it's it's probably related to two things,

Speaker 0:
um, in behavioural finance, one being a cognitive processing error. So that's, uh, you know, you you receive a piece of information, and that's the way you process your brain processes it. So if you look at the work of Kay, you know the the the famous duo you know, prospect theory, for example, you know, told us that framing or the way you word something has an impact or can have an impact

Speaker 0:
in respect of how someone perceives that. So, you know, if you frame something negatively, people go into a lost situation, and they then, um, they then process that information differently to when it's framed positively, positively, for example. So there's a cognitive element, and there's there's an emotion or a reaction, uh, reactive element to that. So, you know, for example, when markets crash, we react instinctively to, um, you know, to that market movement, and we then decide to do something so emotive. Emotive reactions are

Speaker 0:
probably a lot slightly or a lot more damaging from an investment point of view.

Speaker 0:
Um, and that's exactly what we've found. So So if you look at the work of of, um, Michael Pomp and what he's done is he's showed that that on a risk tolerance spectrum, if you look at either sort of, you know, sort of clients who are very conservative and people who are very, um who are very, um, sort of what do you call it aggressive or they don't mind taking risk.

Speaker 0:
That's where the emotive stuff comes in. And then in the middle, you know, the the moderate type of client. That's where your cognitive processing errors come in. So So we found that, you know, using techniques like machine learning. When we segment our client base, we're able to kind of see where the clients are actually falling on these, um, or on the spectrum and how they're reacting to to market movement.

Speaker 1:
Maybe, you know, add to that, uh, people have shown, uh, to be disproportionately more averse to the risk of losing money than they are, Uh, you know, positive about earning rewards. Um, now, this is not fully irrational, though. If if one accounts for the arithmetic effect of returns. You know, if you start off with 100 rand, you lose 50 rand today and tomorrow you gain 50 rand. Well, you're now at 75 Rand. You're not back at 100 rand. So But even if we control for this arithmetic, uh, effect losses

Speaker 1:
are felt more acutely than gains. And we should respect this, uh, you know, and look to provide as much information as possible to clients not only about the risk of their investments, but also about the very real risk of not taking any risk and foregoing earnings. Uh, and wealth growth in the long term. That's always something that I, I think is is is understated by financial professionals is your greatest risk to long-term wealth growth is actually not taking any risk.

Speaker 1:
Um, and by risk, I don't mean unrewarded. I mean, well rewarded risk. Uh, you know, and and carefully regarded risk. So I think people's relationship with money is complicated, uh, and deeply sensitive. And, you know, it differs from person to person so much. Um and this is where

Speaker 1:
advisor, uh, you know is of critical importance. Specifically, in guiding savers to come in become investors Uh, And so for that money that you just put aside for a rainy day to actually put that to productive use, you know, take that well, rewarded risk over time and and build long-term

Speaker 0:
wealth. Absolutely. Thank you so much, Nicole.

Speaker 0:
So, Paul, I wanna bring you in here. I just wanna understand. Then, from a risk approach perspective, you get investors that have a high willingness to take risk in certain aspects of their lives. But when it comes to managing their money, they may seem completely risk averse. Why is this so? Yeah, I mean, that's a great example. So II I worked in very close to the family office in Barclays a number of years ago, and that's something that always struck me. Is that you know, you work with you work with these clients that have accumulated a massive amount of wealth,

Speaker 0:
um, taking a mass amount of risk. But when it comes to their investments, they were always generally very conservative. So So that just goes to show you that risk is domain specific. So people don't, and it goes back to what we were talking about earlier. You know, some people just don't perceive risk where there is risk. And you would find that entrepreneurs sometimes need that overconfidence to actually become successful because they don't feel as much risk than what there actually is in that

Speaker 0:
environment, you know? But when it actually comes to their investments, you put them in another domain. They then become different. So So as Nico was saying, I mean, this is a complicated, um, you know, situation. So how do we How can we start to understand clients better? Well, we can start looking at dimensions like psychology. So there are personality traits that will help us and help us understand how people react differently to these, um, you know, to these different environments but also will help us, Um,

Speaker 0:
and not just the reaction, but also how we should deal with deal with these clients with different people as well. Sharon. So you're in the business of coaching financial advisors. What are the primary client? Behavioural biases that advisors are often, um, challenged with. So we don't I don't know how to name the biases themselves. I can just see behaviour, and then we work with the behaviour so it could be anything it could be, you know, a loss aversion. That could be

Speaker 0:
I don't know, a lot of those Those biases. I don't know them. So you gotta excuse me, but I think what What we what we do notice around the behaviour of clients, is that it? It does vary depending on on the client. And, um, it's not the behaviour, necessarily that we need to be managing. It's what motivates that behaviour.

Speaker 0:
So we we unpack, OK, you're showing up like this around your money. You're not saving enough or you, you know, you're spending in a very your pattern of spending isn't conducive to you having a great outcome. Um, you want financial freedom, but it's you're not working towards that because of your behaviour. We look at the behaviour and say What is causing that behaviour? Where does it stem from? Um, if I'm spending irrationally or I like to spend on shoes when in actual fact, my goal is to educate my Children,

Speaker 0:
you know, then the the spending pattern is not conducive to the goal that you well, it's not. It's not gonna It's not informed by the goal that you want. So why are you spending on shoes and typically, when we go to what's really going on, you end up with an emotion that the client is sitting with. Um, you know, it makes me feel better because, you know, when I've got nice shoes on, I feel more confident, Um, and and they're not aware of those things. They're not aware of what motivates them, necessarily until you start questioning into it.

Speaker 0:
And now I've given a very simple, basic example. But it goes deep as you know, I'm not value. I don't value myself or I've never been valued by this. And then it's then working with, Why is that? Where does that show up from? Whose voice is that? That's playing out in your head. And is that true? If it's true, then I, which we doubt very much it's never true. But what assumption are you holding here that you can maybe replace with something that's going to be able to serve you better in your life? So we go really deep. The behaviour is just how someone shows up. The motivation is what we have to look at.

Speaker 0:
Absolutely. Thank you so much, Sharon. So, Nick, I wanna understand. Then we talk about this modern portfolio theory and the traditionally optimised portfolio. But what is the difference then, between a traditionally optimised portfolio and a behaviorally modified portfolio where clients behavioural biases are taken into consideration,

Speaker 1:
I think maybe take a step back, You know, you you, uh, contrast between traditional optimises and behaviorally informed optimise. I think it's important to

Speaker 1:
just remember that even traditional optimises the simple you know, Markovitz and ones that you mentioned, uh, typically make assumptions regarding risk preferences so that, you know, risk is regarded as sort of a negative. So you want the higher reward for for taking on higher risk. Um, and these risk considerations are also built into the asset location process itself, even even the the the sort of traditional ones, uh, to accommodate the

Speaker 1:
broad risk range from high growth to defensive. So you might. You might pick up these games, you know, defensive strategy or high risk strategy, and this is typically based on, uh, a broad set of heuristics built into the optimizer. But the problem is these assumption assumptions tend to be quite generic and lacks the you know, the subjectivity required, as as Sharon mentioned when it comes to individual needs. Um, and it all

Speaker 1:
also lacks a complete, uh, appreciation of typical behaviour or typical investment behaviour when it comes to losses and gains. Like I mentioned earlier, you know, a greater aversion to loss now. Behaviour behaviorally, uh, modified asset location looks to incorporate client behavioural biases, typical behavioural biases that we see and add some form of subjectivity in its design. So now this is done to ensure that

Speaker 1:
investors are are are based and able to stick to a long term strategy and avoid being swayed by noise in the interim. So you try to adjust the asset location specifically to the client's needs. Now, this can be incredibly important to ensure the path to wealth creation is not, you know, impacted by suboptimal actions in the short term. So moving in and out of positions, selling out of positions when you know, uh, prematurely, um, and examples

Speaker 1:
you know of this is is vast. And we can speak at length about this, you know, clients withdrawing money from equity strategies, for example, during a contraction, you know, only to invest, uh, after a significant recovery. Uh, now, there you just join in the contraction and you don't share in the upside in the recovery. Um, so this behaviour may have enormous compounding effects in the long run, right? So this loss, you're actually compounding in the long run off a lower base.

Speaker 1:
So it's these behavioural elements that you kind of want to bring in, but it requires a a greater level of subjectivity and knowing your plight. And again, this is where, uh, an advisor or someone close to to the the actual investor would be of great use and utilising the instruments that we as, uh, custodians of those assets asset managers, um, provide

Speaker 1:
your advisor to to to give that more tailored, uh, guidance as well,

Speaker 0:
Thank you very much. Can I quickly come in here as well? I think there's There's, um there's something we can also think of. So my did a really, really good paper on, you know, the second generation of behavioural finance. And he he goes back to this really cool example of George Stigler, who I think in the 19 forties,

Speaker 0:
um, he comes up with this thing called the Nutrition Frontier. Right? So it's the and of course you can very quickly kind of identify the similarities here to the mark of its sufficient frontier. So he tried to He basically worked out the 19 forties, the most amount of nutrition that every American could could get per dollar. Um,

Speaker 0:
and and he and he developed this nutrition frontier, and pretty much it He came up with this thing that was, like, 1000 What? It was £1000 of of cabbage, you know, 100 100 cans of navy beans and that you know, there's these kind of ridiculous because no one's gonna eat that. I mean, how do you consume that in a meal, Right. So

Speaker 0:
So you have to, you know, although that that is the optimal, you know, nutrition people are not gonna eat it. So So the relationship here to investments is the same. Is it? Is there any point in having these, you know, sort of efficient portfolios if people can't actually stick to them during, um, you know, during a normal market cycle. So, you know, the the the The lesson here is Well, if we have to add in like butter and fat and sugar, you know it it then it's not optimal in terms of the nutrition, but people actually can start cooking stuff with it, right?

Speaker 0:
So the exact same thing applies when we look at a behavioural, you know, the behavioural portfolio. So if people if people get expressive benefits from, you know, talking about crypto at a we you know, we shouldn't just ignore that, right, Because that's important to people. People want to partake, you know, inherently. We like kind of being in or looking at what the future is gonna look like and partaking in these kind of upswings. So in the same way,

Speaker 0:
we we might want to invest in biotech, right? So we want to We have different values. We want to invest in stuff that's gonna benefit our communities. These are emotional benefits that we get from investing. So so again, you know, Is it, um, is it just about investing in portfolios that are mean, variants optimised? Or should we should we be including people's value systems into investing? ESG, for example, is,

Speaker 0:
I think that's very topical, you know, Do we want to be investing in SAS L? Can we afford to leave sail out in a market like South Africa, where you know, we don't really have that many options, you know? So that's a It's a very, very, very, very, um, important discussion, but one that we could probably spend a bit of a lot of time on now. So then, Sharon, I don't understand. And when it comes to classifying these behavioural archetypes that, um, Paul mentioned earlier,

Speaker 0:
um, into distinct behavioural categories does it support advisors and the approach that they might have with their clients? Um, to a certain extent, because I think, um, you can look at the the archetypes. I think it's very valuable information, and it's very interesting information. But, um, if a plan is not trained properly to actually deal with the information that's given to them through any testing that's done,

Speaker 0:
you know, all it is is nice information. So, you know, I know that I show up in a certain way because I've been profiled in a certain way. But what do I do with that? So it's I think that yeah, I I Sometimes I'm fearful about giving tools like that to individuals that maybe don't understand how to take a client on that journey. Uh, I think the training must be there.

Speaker 0:
And it really needs to be. You can't just box people in and give them an archetype and say this is how you're gonna show up in the world and then not give them a pathway of growth through that so that they can actually be the person that they're supposed to be and that we all have personality archetypes. You know, um and I. I think it's we've all got a pathway of growth. That's why. And I think that's important. And that works the same with your relationship with money, because your relationship money is the same as any other relationship that you might have.

Speaker 0:
And of course, sorry. Sorry. Go ahead, Nico. But

Speaker 1:
it's such an interesting question. If I if if I can maybe add to that you know better understanding clients and their likely behaviour in certain market conditions and and predicting that behaviour would

Speaker 1:
serve to better equip both advisers as well as asset managers to provide that advice that's best suited to a long term goal, you know, of of of growing wealth. Because ultimately, you know, investing is not about, uh, taking unrewarded risk or rolling the dice, so to speak. It is about creating long term wealth. Um, and it's important to have the right guardrails in place for investors that are looking to grow this wealth, right? So in order to ensure that they have

Speaker 1:
have the right discipline, uh, to stay invested and prepare for whatever, uh, you know, eventualities might might challenge their long term view. So keeping the eye on the ball, so to speak. Um and, you know, being open and honest with investors about the risks they face and reminding them that the greatest risk to to wealth creation is not taking that risk at all. Like I mentioned, you know, and ideally, these discussions should happen before market turmoil sets in. Or, you know, before we experience sharp corrections.

Speaker 1:
Uh, you know, discussions after or during the fact might be interpreted at such times, you know, as being in the interest of the advisor or the asset manager to retain assets where, in truth, you are looking out for for your client, you know, there's so many interesting aspects that's so human that we can actually explain to clients, uh, and and and relate to them analogous, using an analogy that that that they can relate to, You know, one comes to mind. I mean, house money versus own money. You know, if you get a bonus from

Speaker 1:
from from work, your first instinct to say, Oh, you know, this is almost manner from heaven. So let's let's either take undue risk with it or, you know, add add to conspicuous consumption. Let's buy a car. Let's go on a holiday where, in truth, having that money in in in the form of a bonus doesn't change the fact that it is yours and that you can use that productively to build wealth the same as any other income. So the source of your income actually even

Speaker 1:
determines how you view that, uh, other, you know, And there's so many other, uh, examples like this, and and you can relate it to investors. Um, so simply, uh, you know, if if you if you think about they did a fantastic study, I can't remember who. But But how we how we relate to this, uh, you know, mental framing. I think Paul will will be able to better, uh, you know, have the right term for it. But you know even our propensity to, For example, drink an expensive bottle of wine If you got that as a gift,

Speaker 1:
you know, opening it up is sort of neither here nor there. You you open it up on a random Tuesday. But if you paid for that expensive bottle of wine, you know, then you wait for a for a great event to say, Oh, I'm opening this bottle of wine that cost me 1000 rand But there's no difference between you owning that expensive bottle of wine. But but where you got it from, W, whether that's a gift or your hard earned money that went to it actually impacts how you view that bottle of wine. You know, Sharon mentioned earlier, you have a relationship with that pen. And but if you bought that pin or got that pen as a gift, it will also impact how you view the

Speaker 1:
that relationship and so understanding how the human mind works when it relates to matters. These weighty matters and specifically, uh, these matters. That or these things that matter over time. So over long, long periods it's so important to to to ground our understanding of this

Speaker 1:
using behavioural psychology to help investors not make the common mistakes that actually degrade their ability to create long-term wealth.

Speaker 0:
Absolutely. Thank you very much. Nicole. Paul, with regards to, um, a recent research piece, um, that you sent through to me. Um, there was often a mention of a behaviour tax. What exactly is a behaviour tax? And what have you observed as I think the behaviour tax is is like the name implies, it's a It's a lower investment return that someone gets because of stuff that they do. Um, so

Speaker 0:
you know, I think why this is so important is, you know, a lot of us have read and, you know, often quoted papers by Dole bar and, you know, behaviour gaps. And you you hear these sort of. But what we're actually doing is we're actually quantifying in rands in a sense, what these behaviours are costing people so we can actually inform businesses, for example, like in in, for example, living annuity unit trusts. Um, stop, stop trading. We can actually tell businesses that this is the amount of value that your clients are destroying by doing certain things, you know, doing the the kind of being in the

Speaker 0:
in the right wrong place, rather with the right place at the wrong time or the wrong place at the right time. So, you know, it really gives an, um, a start starting to give businesses the ability to really identify which segments of their clients are are doing are doing the wrong behaviours or or part taking the wrong behaviours. But also importantly, um, how much it's costing and also how much money we can save, um, clients as well, because, you know, ultimately

Speaker 0:
mean that we can save clients investment return that we can save clients means it's something that the portfolio manager doesn't have to give, you know. So we don't have to leave that responsibility to the portfolio managers where clients are actually just, um, destroying a lot of value that, um, wasn't doing things that are sort of in oppose in an in an opposing position to the portfolio manager what they're trying to do. OK, thank you very much.

Speaker 0:
So, Sharon, do you think that advisor then underestimate, um, how much coaching they require in order to advise clients in navigating some of these emotional biases that they may exhibit um, absolutely. I mean, we can see that things are they are definitely shifting. Um, in the industry, I've been working with planners now on around coaching for the last 10 years.

Speaker 0:
And in the beginning, it was it was something that nobody would even recognise it. It just took too long. How am I gonna get paid for this? What is the value that I'm adding there And now we're seeing that the planners are are really immersing themselves in having those kinds of conversations because that is really where their value lies. And, um, the amount of time that they have to spend on that,

Speaker 0:
uh, you know, it's it's becoming more recognised as something This is how I add value to my client. So but the amount of coaching that is needed because traditionally a financial planning relationship looks like I see you this once and we implement a whole lot of business and we put investments in place and I tell you how to do this because I'm the expert.

Speaker 0:
And then a year later, or six months later, depending on the client, we'll get together again, and we'll maybe have another conversation about what's passed over the last six months and typically focusing on the investment return and not necessarily the behaviour that the client might be demonstrating. Like Paul was saying. Now, if if you if you're bringing coaching into this relationship

Speaker 0:
the the way that you engage with your client is very different, it might take you instead of one or two or three meetings to implement you spend maybe three months with the client on a regular basis to try and uncover. Firstly, what is the real outcome that the client is hoping for here? What is that money? You know, the return that you're hoping for support? What? I mean, what are we trying to achieve? Um, and then how does it support the life that you want?

Speaker 0:
And is that life really what you want? Or are you? You know, you are you searching for something and trying to fill something else, another gap that might be existing that you're not aware of, So there's a whole lot of conversation around. What is the outcome? Let's be clear on that first, because that's what grounds the the plan, and then as we're reviewing, as we're going through this, what behaviour have you demonstrated that brought you closer to that outcome and what maybe got in your way of reaching that outcome. And what can you do differently,

Speaker 0:
you know? So should you be saving more, should you be spending less? Maybe the goal that you is that outcome that you want still relevant? You know, because people are shifting and they they're becoming more aware of what they really need in life. And if that outcome is still what you want, how important is it? Because that also grounds the the client in behaving a little bit better, creating awareness around where they might trip up in their behaviour. And then can we put strategies in place to make sure that you don't

Speaker 0:
You don't trip yourself up. So I think it's more than just the investment return that they're focusing on. Now. It's really about What is that investment return giving you over the long term? What is it gonna How is it gonna enhance your life?

Speaker 0:
Thank you very much. So, Niko, I wanna understand. Now, as individuals approach retirement, they typically go through this de risking scale. Um, as you've mentioned that they approach risk differently.

Speaker 0:
What is the difference in behaviours then that are observed when it comes to living in new, um and, uh, retirement and new. Yeah.

Speaker 1:
So, um, just wanna, you know, add also add on to what Shan said. I mean, it's spot on, you know, it's an investment journey. It's it you you've never arrived. It's a continuous journey, and I think into retirement as well. This journey progresses.

Speaker 1:
Um, and you know, upon retirement sort of legislation stipulates that I think it's at least two thirds of the net. Proceeds from your pension or provide or retirement annuity must be used to purchase a life annuity or a living annuity, right? Or a combination of both. And, um Now, with with life annuities, your your monthly pension amount is fixed and it's guaranteed for the remainder of your life. But

Speaker 1:
with, um, living annuities or or the benefit of that is, you know, you you can't outlive your pension. Um, and so with the downside being, uh, that the proceeds once you pass is not transferred. Uh, and so? So that's That's one of the big downsides. So but with living annuities, pensioners can earn income from a portfolio of assets that that earn this variable income in the hopes of, you know, growing their, uh, pensions payouts and and hopefully preserving

Speaker 1:
some part of that capital to pass on to their kin. Now, the amount that you can withdraw this varies. And so the annuitant needs to to very carefully manage the capital base to ensure that do not outlive their capital. And this is where understanding certain behaviours, especially as you enter the sort of you know twilight of of, of your of your investment journey becomes extremely important. Um, you know, so most advice

Speaker 1:
is, uh, advise using a living annuity. Um, specifically, as the proceeds grow as you age and your family, uh, receive the remainder after you pass now. But this requires great discipline and and and sound advice, uh, in order to ensure that withdrawals are not done at at such a rate that you deplete your ability to increase savings, right? So so that that consideration is incredibly important.

Speaker 1:
But no one behavioural aspect that comes into all of this and comes into play that that can often times be underappreciated. Is this this this access that you get to this, uh, you know one third part at retirement. And so it's almost again. Like like I mentioned earlier, treated as a bonus payout, you know, which which we have less regard for. Oftentimes you know it. It's,

Speaker 1:
um you know, it it it might lead to conspicuous consumption. You take a long holiday, you deserve a break. Buy yourself a new car. Um, whatever that type of consumption is without necessarily the due regard for the importance of preserving that pot that you have, uh, you know, built over your your lifetime. And so their good guidance, uh, is is incredibly important. And it's it. It must be done in a in a way,

Speaker 1:
where there's respect for for the for the for the retirees. Uh um uh, you know, cash flow. Uh, what what? They what they envisage their their life to, to be, like, after retirement. And all of these discussions must be had, uh, timeously, um and and and done with a requisite, uh, appreciation for their own path and their own journey. And so just delving into that path and spending it, uh, might not be wise,

Speaker 1:
but at the time might actually be exactly what the retiree needs. So it it it's such a hard you. You know, there's no hard and fast rule with this, and I think just proper guidance and and and and, you know, having someone to to take you on that journey and and and, you know, hold your hand. Uh, on that journey is so incredibly important. Um, and these are, you know, very weighty decisions because you don't want to end up being dependent on someone or running out of of of your capital. So,

Speaker 1:
uh, yeah. So, Paul,

Speaker 0:
it seems as though you know this whole new two pot system, um, that's, uh, going is expected to be promulgated. Um, either this year or possibly next year. Um really speaks to this mental accounting idea where retirees or or members of pension funds now have a 22 3rd and a one third one third that they may access and the two thirds that need to be preserved.

Speaker 0:
What are the behavioural biases and and the outcomes that we that we are expecting to see from a behavioural perspective? Yeah. So I think I think Nico has probably already touched on this one. So I, I think some people might, Um, when When you have access to something, they might already be spending it. So they might think. Well, now that I have access to this, um, this pot of money, um, they almost already mentally preparing themselves out of, you know, to to spend that money in the future.

Speaker 0:
So the problem with that, of course, is now that, um, when that date eventually passes, um, you know, if they don't spend it, it's almost like a loss. So you move into that kind of loss zone position, which means that you're gonna feel a little bit of pain or loss aversion, because now you're not spending that money. But so that is generally, I think, one of the biggest problems. I think, Look, you know, there's no there's no doubting as well. We live in South Africa where we have, you know, the majority of the population living below the poverty line. So we can't just assume

Speaker 0:
that people who are withdrawing this money are making irrational decisions. I mean, there are there are many, many people who, um are probably desperate and and need any access they can because they're bridging a gap, you know, before um, you know, being out of work, for example. And we've seen a lot of damage done during covid. So? So I can't think we Well, I don't think we should. We should assume that everyone is being irrational, but But I do definitely think that, um, there is this, um, or there will. There will likely be a, um, a bit of an outflow because,

Speaker 0:
you know, people are really trying already already treating this kind of money as spent. Um so they're they're almost because the law allows it. It's OK, um, to do it, um, And therefore, um, that's probably something that's going to hurt people.

Speaker 0:
Given that I think that one of the biggest problems that we have as South Africans is is not preserving as we move between between jobs. So Sharon. Then how would advisors typically assist clients then in identifying and overcoming the biases that they exhibit? Or that they may not know that they exhibit um in their behaviour with money?

Speaker 0:
It's all about awareness, right? So it's about creating the awareness in, and there's very I mean, there's strategies that you can use with a client. Um, when I work with planners. We train them on setting up certain observations. So and every activity that you give the client to do is something that's gonna bring them more awareness around their relationship with money and certain behaviours that might be playing out, that they're not aware of even a budget, you know, asking a client to do a budget, or how often do they do a budget or what is the relationship to budgeting?

Speaker 0:
You know that already just those questions can bring awareness. So and and often planners do a lot of work for clients when they shouldn't. You know, even if the client has a specific goal that they speak of, they want to maybe retire and II. I work for wealth. I work for mutual wealth. So we have a lot of wealthy clients that want to move to Portugal because they, you know they want to be closer to the grandkids.

Speaker 0:
Um, you know, as planners, when we're trying to solve for our clients all the time, because we think that's where our value lies, we'll go do all the calculations. We'll go figure out how much it's gonna cost. We'll put it in the plan and make sure that it works where we should actually be sending the client to go and do the homework. You know, go and figure out how much that's gonna cost. Go and maybe see where you wanna live in Portugal. And you know what? What you need to put away for that. And then through just a little activity like that, we could create awareness around certain

Speaker 0:
misconceptions, you know, and stories that we're telling ourselves. And then, yeah, So the work needs to happen in the client space. And that's how we create awareness for the client so they can see you know what might be getting in their way. And when the client is acting out when they're questioning certain things, Um, a lot of the time you might. It might be reflected as a fee conversation. You know, I'm worried about

Speaker 0:
what I'm paying you. Um, markets are not doing well and you're still getting your income as an advisor. That is an opportunity to question into what is really going on for the client, you know, um, because there's obviously something that has triggered the client that gets them to show up very differently. Um, in that moment, and there's an opportunity there. And often players miss opportunities to create awareness for clients. Because once the awareness is there, then we can try and figure out what is really going on. And how do we overcome any of these biases that

Speaker 0:
that might be playing out here?

Speaker 0:
So, Paul, I'm gonna bring you in here. It seems as though there's, like, a multitude of emotional as well as cognitive biases that you referred to earlier That influence, um, human hero sticks one of them being the disposition effect that, um, Nico mentioned earlier How was this observed through the pandemic specifically? And how

Speaker 0:
has it informed, Um, some of the predictive models. Yeah. So we were, um, in the momentum securities business. We are, um, tracking or we saw rather during covid, we amplified what we call or not what we call what what behavioural economists have called the disposition effect. Now for for some time, it's probably one of the most widely studied investment biases. Um, you the most amount of published work. Um, that's been done. So the dispos disposition effect is basically a combination of two biases. So

Speaker 0:
if we look at the reference point. So that's what we pay for something. What we pay for a stock When the when the markets go up, the price of that stock goes up. We move into the game zone, so we're winning. When the price goes down, we move into the loss zone. So we move into, um, yeah, we become prone to to loss aversion. So So the loss zone, as mentioned earlier, is much bigger than the game zone, which means we feel losses more intensely than we do the equivalent gain.

Speaker 0:
So I mean to take a simple example. So, you know, finding 2 100 rand notes in the street and losing one on the way home is not the same as finding 1 100 rand note in the street, right? So the the the first person is actually in a net state of pain, even though the economic position being up 100 bucks is is pretty much the same for both people. So this these two combinations. So in the game zone, we tend to be regret averse, so we trade too much, so we we worry that this winning position is gonna turn into a losing one

Speaker 0:
and in the losing position, we become loss averse, so we don't trade enough. So, you know, because we don't want to realise That's very painful loss. So what happens in the winning position is we miss out on gains and in the losing position, we let losses run too long. So what we've done is we've combined this into again a behaviour tax calculator. So to actually start calculating what exactly? The rand and sense value of these of these behaviours, um, is costing clients,

Speaker 0:
um, and and then which enables, um us as well to look at different segmentation models as well. So So we found, for example, during covid that Gen X So that's that's me. Um, we were the worst in terms of disposition effect. We had a disposition effect of nearly four times, which basically means that over 80% of gain of trades were happening in the gain zone, 20% less than 20% in the last zone.

Speaker 0:
So the the Gen X on the execution only traders, for example, were actually 1.5% below J set, so their behaviour tax is basically 1.5% below the cash rate for holding cash. In other words, they got 1.5% less than what if they just done nothing and just held the cash in their in their trading account. So

Speaker 0:
So what we can now start to see is again Rand and cents amounts for these different kinds of behaviours. Um, and we can look at strategies, for example, like stop losses. Now stock losses have been shown to to help the disposition effect a lot, or minimise the disposition effect a lot because in the gain zone we have that psychological insurance. So we tend to let the gains run a little bit more. And when we move into the loss zone, we have again that psychological insurance that losses, you know, are going to be limited to a certain amount. So it it tends to change our behaviour.

Speaker 0:
So what we can do is use these kind of models to develop these nudges to to clients that can help them, um, change their behaviour slightly. Um, and that's how we can help them. So Nico Paul has explained the development of these predictive models. Um, perhaps we can swap into machine learning and how artificial intelligence has evolved, Um, to take account and to identify some of the behavioural archetypes

Speaker 0:
and what it ultimately aims to do.

Speaker 1:
Yeah, absolutely. So I just wanna before I I get to the the weighty topic of a I. I think just just maybe add to what? What Paul is saying saying there And it's it's fascinating that you know, these concepts that even seasoned professionals make this mistake, this disposition effect, you know how how often do you use the term We're taking profits. Um, and this is a problematic statement, right? Because you're buying

Speaker 1:
and sell this decision should be made irrespective of whether profit was made in the past or not. So you're anchoring your your entry point should be irrelevant when you evaluate the the quality of an investment or an outcome. Um, you you you shouldn't be saying things like we're taking profits because that just means you're you. You're still referencing a past price, which is now, you know, irrelevant from from the perspective of the current,

Speaker 1:
Um so So when it comes to to a I and machine learning today, you know, we we we kind of think about immediately about chat GTP open a I algorithms that use natural language processing models to to answer any query. Right now,

Speaker 1:
the reality is these models certainly offer the promise of better enabling us to understand and predict human behaviour. But I think and and and you know, so some of the panellists might differ from me, but I honestly think, uh, we are still a long way from getting there, uh, where the machines properly inform us in terms of the complexity of of human behaviour. Um, and even as it matures, we we might see it not being very good at predicting behavioural uh, patterns.

Speaker 1:
Um, an analogy comes to mind. That explains why I think this, You know, when when Deep Blue famously beat Gary Karo and chess, you know, And Alpha go, uh, beat Lee in in In the the infinitely more complex game of Go. You know, it became very clear that machines can process information far more efficiently and tirelessly than you than us. Mere humans can, Right? So the race was on for finding other applications where where we can just decimate humans. Uh,

Speaker 1:
you know, and and and and apply it more more acutely, but with other games. So so with chess and and go, we have no chance against the machines, right? But with other games where the rules are not fixed and better understanding the infinite complexities of human behaviour actually informs the decisions to be taken that that made face value seem, you know, suboptimal. Um, in these games, humans actually fare better, and a game like this is poker.

Speaker 1:
You know, I love poker, and and so the the interesting thing is, the best computer algorithms out there deliver deliver sort of mid table results in poker tournaments. So they corner the the world of chess and and and go completely. But these algorithms actually don't do that well in poker. So while I do see, you know, advances in machine learning and a I improving the efficiency with which, uh, information is summarised and and and and consumed by us,

Speaker 1:
uh, I still think the need for sound financial advice and guidance will remain pretty much as as relevant as always going forward. Um, and the value of having professionals makes sense of all the information that now now we have access to will remain relevant. Um You know, I, I always say you have to remember that something like chat

Speaker 1:
P. Um, you still need to know what to ask And, uh, account for the fact that the algorithm, uh, processing the answer lacks a subjective understanding of the questioner, um, him or herself and their own financial positions and goals. So, I, I honestly don't think that that,

Speaker 1:
you know, even in its most advanced, mature form, I don't think this will be a silver bullet for, uh, for for guiding investment decisions. It it should remain subjective. And there should be a a level of human and machine. So I think how this develops and matures in in in the future, we it's still uncertain. Uh, I, I think

Speaker 1:
it's incredibly exciting. Uh, and and we'll remain to see how it affects our our industry, and it certainly will. Um I just don't think it's gonna render advisor and and managers like redundant I. I don't think, um, you know that that the algorithms will corner the investment game the same way it did, uh, chase and and go.

Speaker 0:
So then, um Sharon, I'd like to hear from you. Why has there been a need then for managers, um, or perhaps advisor to integrate behavioural biases into their,

Speaker 0:
um decisions or the conversations that they're having with clients. The information is out there, and I think it's very valuable. And for financial advisers to be aware of the way that clients show up in different situations because of how the brain, you know, manages us to keep safe and all the other neuroscience that's behind it and the psychology. It's all very interesting, but I think it's so much more important for them to realise that these biases play out in their own lives as well. So when they're managing clients money,

Speaker 0:
you know, they they actually have to overcome the way that they see the world and their perception of the world and these biases that play out. And it's very hard to see our own stuff. So, you know, because we obviously you need somebody to, to to hold up the mirror, to say this is what's going on. So I think the the most important thing around this is

Speaker 0:
that they need to understand their own relationship with money, their own relationship with investing with risk, Um, because that plays out in the client's portfolio, and we've seen it time and time again. And then if they can see their own stuff and make sure that their stuff stays out of the room when they're engaging with their clients, then it's easier for them to to help clients see their biases

Speaker 0:
and what might play out in their relationship to their money. Um, and they and you know, their their journey to financial wellness or financial freedom, whatever that might look like for the client themselves. Yeah, I think that's the big thing. The even I can't see my own stuff. So I need someone to tell that you know, Sharon, this is what's going on for you

Speaker 0:
now to close up the session. Paul. Psychology certainly plays a role in the world of investing more so now than ever. Where do you see future developments taking place? I mean, we've spoken about machine learning and a I, but when are the further developments that you're expecting to see change?

Speaker 0:
Um, particularly around behavioural finance? Um, Clay. So look, I think it's going to be massive. So, I, I don't think we can We're moving to, um what many people are calling the empathy economy. So the empathy economy is where people are starting to look at psychology, to solve the world's problems and and away from economics. So I mean Rory Rory Sutherland, who's, um, obviously the marketing mogul from Ogilvie. And I mean, he was one of the founders of the probably the biggest behavioural science unit and the most successful, um, that the world has seen.

Speaker 0:
And he gives the example about, um, you know, maximising You know, the the the engineers who maximise the trip or the the the length of the trip between that train trip between London and Paris, and it cost about £6.5 billion and they managed to shorten the trip by 40 minutes, you know, and what he was saying was, Well, if you got you know, if you got suit models to walk up and down and handing out free champagne, you would have saved yourself £3 million and

Speaker 0:
people would have been actually asking you to delay the trip by by 40 you know, make make the trip 40 minutes longer, you know? So So the point is, and I think he also gives the example of uber as well. So where people really have underestimated the actual value of uber being sort of something on a screen where we can actually just see where the person is and how long it's gonna take to pick us up. So if the psychological value functions, I think that are becoming more important, it's less than

Speaker 0:
less about things like utility. You know, we we're We're sort of running out of room for technological improvement, but I think psychology there's a lot of space for it. So if we just understand how and why people are making decisions and we're more human centric in in these moments, there's a lot of value to be added. So I think psychology at is at sort of the the start in terms of financial planning, you know, the benefits that we can start adding.

Speaker 0:
I mean, I think things like financial therapy and we need to think about, by the way, regulatory frameworks. And, um, you know how we're going to regulate this new field of financial therapy in, um, you know, in financial advice as well, by the way, because you know, these are when you, when you're dealing with these kind of complex states. In many cases, there is a framework that probably is necessary. And there are There are some sort of, um I see a lot of, like the FP I, for example, to to with this, um, with these areas as well. But

Speaker 0:
But I think in in a in a nutshell. Psychology is going to make, um it is going to play a much bigger role in providing a shield against things like a I. I mean, I, I was reading something, um, earlier on. So apple have just actually applied for a patent, um, to actually turn this little ear pod into an EEG machine.

Speaker 0:
So basically, very, very soon these little ear pods are gonna be able to read your brain waves. And I mean, the world is is further and further down the rabbit hole we go. So, I mean, if if you think about the kind of data that a computer or a machine is not going to be able to understand about the way you think because you plug this thing into your ear, I think you know we need to be a little bit careful about, um, you know thinking how far this can go because it can go quite far. Um,

Speaker 0:
but I think psychology is going to provide a natural shield to things like, um, like machine learning, for example, in the encroachment of of a I on the financial advice profession specifically because, you know, maybe the last comment is there's still a massive trust deficit out there, you know? So human beings, um, you know, when you we see one accident with a driverless car,

Speaker 0:
everyone is up in arms. This stuff doesn't work. It's rubbish. But how many accidents do humans cause every year, you know? So we have this Nat Natural Trust deficit with a I. So people are going to prefer to speak to a human being when they empathise, or someone that can empathise with them, who's had the same financial struggles, for example, that they've had. So the preference, I think, is going to be towards humans. But, um, I don't think that we should underestimate the threat that this could pose because I think we are, um, you know, the curve at the moment is going far. It's going up so fast.

Speaker 0:
Um, that I think you know, when when our ear parts start, uh, sort of, you know, read our brain waves. I think, um, we're we're heading to a scary place. Absolutely Well, on that note. Thank you very much. Paul, Nico and Sharon for sharing your insights. We appreciate your time. Thanks for having me. It's been great.