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Behavioural Finance

 

We each have our own individual preferences, strengths and weaknesses when it comes to most things in life, so why not also with respect to risk? Behavioural Finance is a field of research that respects human behaviour.

 

Emotions at the Trading floors

It seeks ways to describe this behaviour, the impact it has on the market, and how to better support investors in fulfilling their financial goals and avoid biases.

At AGFIF we believe that the insights of Behavioural Finance help us understand and service you better. To this end we are proud to offer the BhFS risk profiling tool developed out of the Swiss Banking Institute at the University of Zurich. The institute is directed by Prof. Dr. Thorsten Hens, a BhFS partner and Member of AGFIF's Advisory Board.

Behavioural Finance – discovered by a motivation to find a complete risk measure Benjamin Graham, the father of fundamentals-based equity analysis, declared eighty years ago that investors are their own worst enemy. He was only partially right. Investors do indeed make psychological mistakes, but good risk management can help avoid most of them. The problem remains, however, that risk management often concentrates on risk measures that are unsuited to investors. So how can risk be measured? Behavioral finance adds to the value of traditional mean-variance analysis by taking theories and assumptions on how investors behave towards risk and tests them.

Harry Markowitz first expounded his modern portfolio theory – based on mean-variance analysis – in 1952. However, mean-variance analysis is unsuitable for many private investors. Variance is defined as how far a value deviates from the mean, regardless of whether this deviation is up or down.

Behavioural Finance shows that investors are loss averse, and that losses are felt more strongly than gains. A loss is a short fall behind a personal reference point that itself is a crucial aspect of the investor’s risk preferences. Behavioural finance was founded by two psychologists, Daniel Kahneman and Amos Tversky. Daniel Kahneman received the Nobel Prize in 2002 for developing Prospect Theory, the foundation of Behavioural Finance. Risk is how we perceive and experience it, not an abstract theoretical ideal.

pfeilVideo:   Watch video files about prospect theory and other key ideas in behavioral finance. Interrview with Daniel Kahneman of Princeton University, October 19, 2009

Thus risk needs to be measured on an individual basis, because we perceive and experience risk differently. That is to say, we each have a unique optimal portfolio – this is contrary to the popular idea that there is a universal “best investment strategy”.

“Every investor has a different perception of their investments, and suffers from different biases. It is no wonder that each investor has a different optimal portfolio.” – Prof. Dr. Thorsten Hens

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Behavioural Finance for Private Banking

Behavioural Finance for Private Banking
by Thorsten Hens and Kremena Bachmann

“AGFIF is the best wealth management firm I have ever worked with.
I
was impressed by their unique method of giving me the best portfolio
– Client testimonial bhfs

 

 Behavioural Finance Solutions GmbH

BHFS

The client risk profiler we use is an innovation of Behavioural Finance Solutions GmbH, a spin-off from the Swiss Banking Institute at the University of Zurich. Behavioural Finance offers the best theory to explain the connection between the investor to the portfolio, evaluating risk preferences and biases. Risk is how you perceive and experience it, not an abstract theoretical ideal. With the risk profiler, we can see the market through your eyes, how you experience and perceive it. Your definition of gains, losses, and risks are calculated with the BhFS model reflecting 50 years of advances in finance.

For more information on BhFS or behavioural finance

   

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