Wealth management (dual perspective): how age shapes financial management choices through behavioral economics

Abstract

In an era of increasing financial complexity, financial service companies continuously seek to optimize their portfolio recommendations and risk profiling techniques. However, financial service companies often rely on oversimplified risk profiling methods that rely heavily on demographic factors- such as age, income, and occupation. Pioneering works by scholars like Daniel Kahneman and Richard Thaler have demonstrated that human financial decisions often deviate from rational economic models due to inherent behavioural biases. Financial service companies fail to capture the dynamic psychological/cognitive biases that influence investment behaviour in real-life situations of their clients. This gap creates mismatches between clients’ true risk tolerance and the recommended portfolios, weakening client-advisor relationships and eroding investor confidence. Our Capstone project, "Wealth Management (Dual Perspective): How Age Shapes Financial Management Choices Through Behavioral Economics", aims to bridge this gap. Age not only reflects life-stage needs but also interacts with cognitive biases that indirectly shape financial behaviours. Financial firms can bridge the gap between clients’ perceived and actual financial preferences by integrating behavioural insights into risk-assessment tools. We seek to enhance how financial service companies understand and categorize their clients beyond demographic inputs. After conducting multiple interviews, we concluded to focus on three pervasive behavioural biases: ● Loss Aversion Bias: Investors’ tendency to fear losses more than they value gains. ● Status Quo Bias: Investors’ reluctance to disrupt established financial habits or stick with the default options. ● Availability Bias: Investors’ overreliance on the information that is readily available or on recent events. For companies to achieve better risk profiling techniques, we propose redesigning client intake forms to include targeted questions and scenario-based assessments that quantify these biases. The findings of this study have practical implications for the financial service industry, potentially leading to better portfolio alignment and reduced instances of financial mis-selling.