Cognitive Bias
Case Report HelloWallet
Q1: How do the concepts of behavioural finance create opportunities for
HelloWallet?
Private pensions are shifting more and more from defined benefit to defined contribution plans. This results in the shifting of responsibility for asset accumulation from the employers to the employees. As of 2008, the ratio of DC to DB pension plans is 3:1. Therefore, there will be more investors required to invest for retirement on their own. The company now has no long term pension liabilities to worry about.
Currently the model for HelloWallet does not incorporate behavioural finance into their analysis of an investor’s portfolio. The use of behavioural finance concepts will create the following opportunities for HelloWallet.
Availability Bias: People will be influenced more by what they can easily retrieve from memory. Availability bias is a human cognitive bias, which causes us to overestimate probabilities of events associated with memorable occurrences. A prime example of this would be plane crashes. Plane crashes are extremely rare; however, the vast majority of people widely overestimate their probability. This can be especially useful in media advertising to prospects that are experiencing “stress points”; being easily recalled from memory increases the likelihood that HelloWallet will be chosen.
Self-Control Bias: The software shows how the user is spending his money, and where they can save and where they can spend more while still investing towards their retirement. In this way, the software helps the user to balance the need for immediate satisfaction with long-term goals. It also shows when the investor gets off track of his financial goals. This can help to eliminate this bias.
Keeping the client on track is the most important aspect of saving money.
Regret Aversion: By showing the investor the potential savings loss from having not
Q1: How do the concepts of behavioural finance create opportunities for
HelloWallet?
Private pensions are shifting more and more from defined benefit to defined contribution plans. This results in the shifting of responsibility for asset accumulation from the employers to the employees. As of 2008, the ratio of DC to DB pension plans is 3:1. Therefore, there will be more investors required to invest for retirement on their own. The company now has no long term pension liabilities to worry about.
Currently the model for HelloWallet does not incorporate behavioural finance into their analysis of an investor’s portfolio. The use of behavioural finance concepts will create the following opportunities for HelloWallet.
Availability Bias: People will be influenced more by what they can easily retrieve from memory. Availability bias is a human cognitive bias, which causes us to overestimate probabilities of events associated with memorable occurrences. A prime example of this would be plane crashes. Plane crashes are extremely rare; however, the vast majority of people widely overestimate their probability. This can be especially useful in media advertising to prospects that are experiencing “stress points”; being easily recalled from memory increases the likelihood that HelloWallet will be chosen.
Self-Control Bias: The software shows how the user is spending his money, and where they can save and where they can spend more while still investing towards their retirement. In this way, the software helps the user to balance the need for immediate satisfaction with long-term goals. It also shows when the investor gets off track of his financial goals. This can help to eliminate this bias.
Keeping the client on track is the most important aspect of saving money.
Regret Aversion: By showing the investor the potential savings loss from having not