Investment and Risk Tolerance

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Hello Wallet Case

GIIM 636

Question 1: How do the concepts of behavioral finance create opportunities for HelloWallet?

The current financial advising sites such as HelloWallet as well as its competitors, such as Mint.com and Yodlee, provide budget and virtual financial advising service based purely on user bank transactions and spending category. The HelloWallet system allows the user to create and track customized budget plan. What is more important is that the system can automatically provide financial advice and saving tips by using data mining techniques.

However, HelloWallet and its competitors do not provide any financial analysis and evaluation based on user behavior and their psychographic characteristics, such as user personality, values, attitudes, interests and risk tolerance in terms of willingness. These psychographic classifications are extremely relevant with regards to individual strategy and risk tolerance. Even with the similar bank transactions data and spending category, an investor background, past experience, personality and attitudes can make investment process unique for each individual. With the help of behavior finance theory, HelloWallet can build system to fit psychographic profiles to specific behavioral investor profile. As a result, a better understanding of user behavioral tendencies of spending and investment will help to provide better financial advice.

An easy and quick way is to build online questionnaire to fit each individual into different behavioral investor types. There are several models we can use, Barnewall Two-way model, Bailard, Biehl, and Kariser Five model and Pompian model. We use Pompian models as an example. The major reason for promoting Pompian is because it is less time-consuming and less complex. Therefore, it will be easy to be implemented on an online system and require less time spent on filling out the survey (as we pointed out in challenge, it is not an easy task to ask online user to fill out survey with a lot of details).

Pompian model identifies four behavioral investor types based on risk tolerance and active/passive scale: passive preserver, friendly follower, independent individualist and active accumulator. It is a top down approach which is more efficient and simple by categorizing users into passive and active, then further break down into four types based on their risk tolerance. With these information, the user of HelloWallet will be categorized based on their investment/spending behavior type. Based on these different types, the system can easily provide more tailored investment tips and products to users. For example, once a user behavior type is identified, the system can provide saving and investment tips accordingly. For example, when a user is identified to be a passive preserver whose risk tolerance is low and emotional, the system provides low risk financial products (excluding high risk ones), e.g., 2-year GICs. In addition, the system can try to persuade the soundness of these financial by focusing on elaborate the goal of these investment (what the terminate value will be and what type of investors these investments for). If investor specify a long term income need, the system can provide financial products on bond index fit their spending goal (contrary to the current systems which spam non-relevant financial products to all the users without differentiate their needs and risk).

With the introduce of the behavior investor/user types into the systems, HelloWallet can extend their financial advising service from purely creating budget plan and providing saving tips to a more sophisticated investment approach that fits each individual unique needs and background. For example, HelloWallet is currently able to recommend a customer to apply for a visa with $500 cash points per year because excessive spending on grocery and large cash deposit 10,000 in the checking account. With the new behavior investor model, it can...
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