Thread
Somehow behavioral finance has become boring. A snoozefest. How could a galvanized discipline which once broke down walls evolve into something that’s sort of, well, meh?
Despite its prevalence, how has the *application* of BeFi been mostly a swing and miss?
A🧵...
1/
Despite its prevalence, how has the *application* of BeFi been mostly a swing and miss?
A🧵...
1/
When you read Michael Lewis’ The Undoing Project, you can’t help but be enchanted by two random Israeli psychologists saying to the entire economics profession: When it comes to people, you have no idea what you’re talking about. Bazinga!
2/
2/
Fast forward half a century, Nobel Prizes and airport bookstores proclaim that BeFi has arrived. It feels like a bit of a pyrrhic victory though. We have a “BeFi Entertainment Complex” (cc @EbenBurr). TED talks, fun books about smart people doing stupid things, etc.
3/
3/
But have these rich and varied insights into human psychology actually helped real people make better financial decisions?
Not much, no.
So what’s going on?
4/
Not much, no.
So what’s going on?
4/
First off, the field has somewhat become a victim of its own success. What was once a series of iconoclastic insights have now become pretty well accepted. Yes, academic debates continue on prospect theory and the other foundations of behavioral finance.
5/
5/
But we *know* that “bad is stronger than good,” that we neglect probabilities (hence, are terrible forecasters), suffer from overconfidence, confirmation bias, and on and on.
Great. Who cares?
(Everyone and no one are both reasonable null hypotheses.)
6/
Great. Who cares?
(Everyone and no one are both reasonable null hypotheses.)
6/
It is true, back to BeFi entertainment, that we care that the podcast world’s virtual shelves are jammed with Freakonomic-style human quirk porn. Which I enjoy, by the way.
7/
7/
And, more seriously, “behavioral science” divisions at companies and gov’ts are thinking about how consumers and citizens can make “better” decisions. Nudge, anyone? The Nudge wormhole is best left for another thread another day. (I have mixed feelings.)
8/
8/
The fact is that in (what should be) BeFi’s inner sanctum - better financial decisions - the discipline has faltered.
For example…
9/
For example…
9/
There are still curricula for major financial planning training programs which continue to teach that re BeFi, the advisor’s highest and best use is diagnosing their clients’ bias and creating strategies to evade or (lord help me) fix them.
10/
10/
In the $70T+ wealth mgmt biz, the primary takeaway from 50 yrs of BeFi boils down to: “When markets are volatile, find ways to keep people from selling.” The insight is narrow enough to be suffocating. But trust me it’s water’s edge for most firms on “behavioral insight.”
11/
11/
Even so, we continue to see white papers (i.e., marketing pamphlets) with the milquetoast claim that “behavior matters” for financial outcomes. This is one of two things: false or uninteresting. Well, it’s not false, so it must be the other. A well-formatted tautology.
12/
12/
Bottom line: Behavioral finance generates fascinating insights but hasn’t had much practical impact on financial advisors and their clients seeking to make better financial decisions, let alone achieve financial wellbeing.
13/
13/
Okay, then what’s next?
One answer: It’s time to go beyond biases. To craft a next generation of *applied* behavioral finance that recaptures the old school iconoclasm combined with insights from other disciplines, all *usable” by advisors and clients.
14/
One answer: It’s time to go beyond biases. To craft a next generation of *applied* behavioral finance that recaptures the old school iconoclasm combined with insights from other disciplines, all *usable” by advisors and clients.
14/
It’s Behavioral Finance 2.0.
15/
15/
Let’s start with the epicenter of BeFi 1.0: biases and heuristics. These are our endless foibles, short cuts, irrationalities, and so forth. State’s evidence is this beautiful monstrosity:
16/
16/
Somewhere along the way, the advice business decided that an encyclopedic knowledge of these meant “knowing” your client, as if (1) any of us are truly qualified to assess these biases, (2) it matters if you can, and (3) there aren’t many incongruencies among them.
17/
17/
We need to move on from "biases."
(That felt weird, but good, to say out loud.)
Instead, we need the following transformations (listed in no particular order)...
18/
(That felt weird, but good, to say out loud.)
Instead, we need the following transformations (listed in no particular order)...
18/
💥Conceptual → Practical
BeFi will be powerful it becomes practical. Sure, we start with concepts and mental models, but then we must put them into action with measurable benefits. This is the whole enchilada in guiding our clients toward financial wellbeing.
19/
BeFi will be powerful it becomes practical. Sure, we start with concepts and mental models, but then we must put them into action with measurable benefits. This is the whole enchilada in guiding our clients toward financial wellbeing.
19/
💥Irrational → Normal
It’s time to stop pathologizing normal human behavior as irrational, let alone stupid. We don’t know others’ (or our own) complex preferences, so the concept of rationality is broken. Let’s address attitudes and behavior with an “it just is” mindset.
20/
It’s time to stop pathologizing normal human behavior as irrational, let alone stupid. We don’t know others’ (or our own) complex preferences, so the concept of rationality is broken. Let’s address attitudes and behavior with an “it just is” mindset.
20/
💥Weakness → Strength
Hello positive psychology! Let’s inject modern psych’s focus on what’s right with us (and how to get even better). Going “beyond biases” means going beyond our flaws and digging in on how to live better lives.
21/
Hello positive psychology! Let’s inject modern psych’s focus on what’s right with us (and how to get even better). Going “beyond biases” means going beyond our flaws and digging in on how to live better lives.
21/
💥Analysis → Empathy
Enter the right brain. It’s one thing to be “smart.” It’s another to be able to listen and engage in a way that is truly constructive. Empathy is a superpower which requires hard work to get better at, which everyone can. @joylerepsyd work on this = 🔥
22/
Enter the right brain. It’s one thing to be “smart.” It’s another to be able to listen and engage in a way that is truly constructive. Empathy is a superpower which requires hard work to get better at, which everyone can. @joylerepsyd work on this = 🔥
22/
💥Piecemeal → Holistic
“Beyond bias” also means no more cherry picking one-off behaviors and extrapolating toward some (flawed) assessment of the self. Start at the other end, with a top down view of overall wellbeing. Then amplify what’s working and address what’s not.
23/
“Beyond bias” also means no more cherry picking one-off behaviors and extrapolating toward some (flawed) assessment of the self. Start at the other end, with a top down view of overall wellbeing. Then amplify what’s working and address what’s not.
23/
💥Investments → “Money Life”
“Applied befi” has been about weathering portfolio volatility. BeFi 2.0 embraces all 7 dimensions of money life: earning, spending, saving, investing, borrowing, protecting, and giving. How our brains navigate these reveal many growth opps.
24/
“Applied befi” has been about weathering portfolio volatility. BeFi 2.0 embraces all 7 dimensions of money life: earning, spending, saving, investing, borrowing, protecting, and giving. How our brains navigate these reveal many growth opps.
24/
💥Numbers → Stories
Lastly, let’s finally accept that humans are storytellers, not calculators. Yes, finance, numbers, decimals, etc. But we’re talking about better lives, about funded contentment here. Money is a story. Risk is a story. Wellbeing is a story. Write yours.
25/
Lastly, let’s finally accept that humans are storytellers, not calculators. Yes, finance, numbers, decimals, etc. But we’re talking about better lives, about funded contentment here. Money is a story. Risk is a story. Wellbeing is a story. Write yours.
25/
You won’t be surprised that “BeFi 2.0” and “Beyond Biases” are driving the experiences that @neilbage @joylerepsyd and I are creating @Shapingwealth.
26/
26/
These revised frames help us execute a “human first” approach to financial advice. And to do our part in helping others achieve funded contentment.
Stay tuned for a lot more from us on all this in 2022.
27/end
Stay tuned for a lot more from us on all this in 2022.
27/end
Mentions
See All
Ramit Sethi @ramit
·
Jan 4, 2022
This is a very good thread on where behavioral finance falls short Behavioral economists got very excited creating a list of cognitive biases, which helps no one One meaningful conversation about your money psychology is worth more than an entire taxonomy of cognitive biases