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Understanding the human side of money
Behavioural economics explores how psychological factors affect financial behaviour. In wealth management, this means recognising that clients may not always act in their own best interest, even when the numbers suggest they should.
Dr Ariel Gu, a lecturer in Behavioural Finance, helps us explore our understanding of this area.
Wealth management isn’t just about spreadsheets and market forecasts - it’s about people. And people, as behavioural economics reminds us, don’t always behave like rational calculators. We’re influenced by emotion, habit, bias, and instinct. Understanding these patterns isn’t just interesting - it’s essential to helping clients make better financial decisions.
Behavioural economics explores how psychological factors affect our choice behaviour; behavioural finance focusses on our financial behaviour. In wealth management, this means recognising that clients may not always act in their own best interest, even when the numbers suggest they should. For example, someone might hold onto a poorly performing investment out of loss aversion, or delay making a pension contribution because the decision feels overwhelming.
Loss aversion One of the most common biases we see is loss aversion – the tendency to fear losses more than we value gains. This can lead to overly cautious investing or reluctance to sell underperforming assets. By gently reframing the conversation around long-term outcomes and probabilities, advisers can help clients move past the emotional weight of short-term losses.
Confirmation bias Another is confirmation bias, where people seek out information that supports their existing beliefs. This can affect everything from investment choices to views on market trends. A good adviser helps challenge assumptions constructively, offering alternative perspectives and grounding decisions in evidence rather than emotion.
Overconfidence Overconfidence is another frequent visitor – especially among successful business owners or experienced investors. It can lead to excessive risk-taking or a belief that one can “beat the market”. Wealth managers use structured decision-making processes and collaborative planning to temper this instinct, ensuring choices are thoughtful and well-balanced.
Herd behaviour Then there’s herd behaviour – the tendency to follow the crowd, especially in times of market volatility. When headlines scream panic, it’s easy to feel swept along. A strong adviser-client relationship, built on trust and clear communication, helps anchor decisions in long-term strategy rather than short-term noise.
We also use behavioural insights to shape our own processes. For example, we favour collegial decision-making to reduce the risk of individual bias. We build portfolios that are diversified and resilient, so clients aren’t forced to sell depressed assets in a downturn. And we structure planning meetings to look forward, not just back – helping clients stay focused on what they can control.
We also use tools like cashflow modelling to make abstract concepts more tangible. Seeing how different choices affect future outcomes helps clients feel more confident and engaged. It turns “what if” into “what’s next.”
Ultimately, behavioural economics reminds us that wealth management is as much about psychology as it is about finance. By understanding how people think and feel about money, we can help them make decisions that are not only smarter – but also more aligned with their values, goals, and life story.
What is behavioural finance in simple terms?
It’s the study of how psychology influences financial decisions – helping explain why investors don’t always act rationally, and how better awareness leads to better outcomes.
How does behavioural finance improve wealth management?
By understanding emotional and cognitive biases, wealth managers can design strategies that reduce overreaction, improve discipline, and support long-term success.
What are the most common behavioural biases in investing?
Loss aversion, confirmation bias, overconfidence, and herd behaviour. Recognising these helps investors stay focused on their goals rather than short-term noise.