We look at a recent business venture and what that says about the ability of modern technology to enable insights from behavioural finance to be built at scale.

Behavioural finance is starting to go prime time, so its advocates say.

The term, which relates to how psychological insights unpick why people make certain financial choices, has had its cheerleaders for decades. Given market gyrations and worries that far too many people reside in low-yielding cash because fears of loss put them off, behavioural finance is not merely an academic pursuit.

A problem, however, is that harnessing these ideas in real-time requires immense number-crunching capabilities that had, until a few years ago, been beyond the armoury of wealth management. But AI has changed that.
 
In September, US-based investment manager Invesco launched a Personalised Investor Engine (PIE), a behavioural-intelligence platform designed to help financial institutions convert savers into investors. It has launched PIE with Zopa, applying the technology across the digital bank’s 1.5 million mass-affluent customer base. 

Built with behavioural science expertise from Oxford Risk, a technology and behavioural finance company, PIE uses behavioural profiling to identify individual barriers and tailor interventions at key points in the customer journey. The platform was informed by a 6,000-participant Invesco research study into why savers stay in cash. Crucially, it found that external trust in institutions and internal self-confidence are distinct barriers requiring different interventions, and that rising cash balances tend to deepen fear of loss rather than easing it.

The hope is that putting money in motion will benefit the wider industry, ease strains on public finances as citizens build capital for retirement, and will lift wealth in general. 

Using AI-driven tools to help with behavioural investing insights is a “win-win for firms, people and policymakers,” Greg Davies (pictured below), head of behavioural finance, Oxford Risk, told this publication in a recent call. 

Greg Davies

“I have been doing this [behavioural finance] for 25 years and for most of the time that has been coming up against a scalability problem. That’s changed in the past three years with AI and LLMs [large language models],” he said. “The financial industry is still in the foothills of what’s possible.”

The Invesco deal is significant, given that the US-headquartered firm carries plenty of investment muscle, with $2.453.5 trillion of assets under management at the end of October. 

Reluctance to invest is less of an accessibility problem; it is more about the worry of losing money. Building comfort is important to get investors to take a step forward, Sonia Bainbridge (pictured below), head of digital distribution, EMEA, Invesco, said when the product launch was announced. There is an estimated €10 trillion ($11.5 trillion) being held in cash across Europe.

Sonia Bainbridge

“Our research suggests the challenge is no longer access, it's activation. Fear of loss, low confidence and uncertainty about making the right decision continue to prevent many people from turning intent into action,” she said. 

The field of behavioural finance continues to develop. As reported here in 2022, it is the “dominant differentiator” in the philosophy and marketing strategy of Fusion Family Wealth, a Long Island, New York-based wealth manager. This emphasis on behavioural finance is part of the “maturation process of the industry,” according to the Investment & Wealth Institute in the US. The Certified Financial Planner Board of Standards has included behavioural finance concepts in a round of examinations and published a new book entitled The Psychology of Financial Planning. To give another example of how the discipline touches wealth management, Queen Mary University of London has a master’s degree course in behavioural finance, with a CFA pathway for those seeking CFA Institute accreditations. 

UBS carried a January 2023 paper by Nobel Laureate Richard Thaler, a figure synonymous with behavioural finance, talking about Building better, healthier habits with behavioural economics. It is clear that the discipline has been working its way through wealth management.

Where the rubber hits the road
Ventures such as that of Invesco highlight the way forward, showing that modern technology is an important component, Oxford Risk’s Davies said. 

“If you just lecture them [the citizen] more and give them lots of numbers, then people think 'we’ve done our job and that should convince everyone they should be investing’,” he continued.  

Nudging and encouraging people to invest will not work without personalising the investment experience, Davies said. That’s where the value of AI with its ability to handle data comes in. 

“AI has dramatically reduced the cost and complexity of delivering personalised engagement at scale. But that makes the quality of the underlying behavioural science and decisioning models even more important,” Davies said. “The AI shouldn't be inventing the answer; it should be using robust, validated models to determine what support different investors need,” he said.