Financial literacy and behavioural biases are critical factors affecting the financial decisions and behaviours of investors. Mainstream finance theory is based on two fundamental assumptions: “Individuals make rational decisions” and “individuals are without prejudice in forecasting the future.” However, research has shown that these assumptions may be flawed. Behavioural finance is a field that has emerged as an attempt to understand how emotions and cognitive errors affect the decision-making processes of investors.

This course identifies and explains the effect of behavioural and emotional biases on investor’s investment decisions. It then develops various approaches to mitigate the effects of emotional and behavioural biases on investment policy and asset allocation decisions. We then turn to the concept of bounded rationality and evaluate its effects on investment decisions. A method to understand investor behaviour is to classify them according to personality types. We examine the advantages and disadvantages of the various classification approaches. To wrap up, we look at how to use behavioural finance to improve the adviser–client relationship to ease the process of helping investors make better investment decisions.

Relationship Managers in Private Banking

• Monitoring the effect of behavioural and emotional biases on investment decisions
• Develop approaches to mitigate the effects of behavioural biases on investment policy and asset allocation decisions
• Evaluate effects of bounded rationality on decision-making
• Classify investors according to personality types
• Advantages and disadvantages of various classification approaches
• Using Behavioural Finance to Improve the Adviser–Client Relationship
  

Part 1: The effect of behavioural and emotional biases on investment decisions

• Types of behavioural biases
• Impact on investment decisions

Part 2: Investment policy and asset allocation: How to mitigate behavioural biases

• Investment Policies & Asset Allocation
• The impact of behavioural biases
• Methods to mitigate behavioural biases

Part 3: Bounded rationality and its impact on decision making

• Bounded rationality
• Cognitive errors
• Effect on the decision-making process

Part 4: Investor classification based on personality types: advantages and disadvantages

Part 5: Using Behavioural Finance to Improve the Adviser–Client Relationship

• Establishing the relationship
• Profiling the client
• Making recommendations
• Evaluating performance and renewing the relationship

Part 6: Summary

Assessment - MCQ