Episode 116

Behavioural Finance with Greg Davies

Are your financial habits helping your money decisions, or are they causing you stress?

In today’s show, we have another fascinating conversation with Greg Davies, as he comes back to chat with us for a third time! Greg dives into the concept of behavioural vulnerabilities and the importance of anxiety-reducing returns when making money choices. He also shares insights on how we can identify and adapt to our behavioural traits to make better financial decisions. If you’ve enjoyed Greg’s previous appearances on the podcast, you won’t want to miss this insightful follow-up conversation. Let’s get started!

Welcomes & Introductions

Want to know more about Chris Budd’s The Financial Wellbeing Pulse? Take a look here
Fancy a chat with Tom Morris and the team at Ovation? Contact details here

What’s on Today’s Podcast?

We have another chat with Greg Davies, head of Behavioural Innovation at Oxford Risk – exploring how our behaviours effect our financial relationships.

Catch up on previous conversations with Greg Davies in Episode 25 – Behavioural Economics and Episode 38 – Keeping it Fuzzy

Tight Ass Tommo

Chris’s tip – saving up for a big ticket item? Us mental accounting to help – set up a new account and give it a specific name related to what you are saving for. You are more likely to reach that savings goal!

#TATTOTW – As electric vehicles become more popular, Tom shares his tips for keeping costs down, including having a smart meter, going onto dual/evening tariffs and consideration around when you charge your car.

Interview with Greg Davies

What has Greg been up to in between interviews on The Financial Wellbeing Podcast?

Working in applied behavioural finances – building ideas into technology to help people make better financial decisions.

How do we know what ‘better’ is?

We should be chasing anxiety reducing returns

What do we mean by Financial Personality?

We are bad at assessing our reaction to stressful situations when we are not in stressful situations!

Attitudes to risk

Behavioural vulnerability

There is no right place to be, you are where you are

A few examples of behavioural vulnerabilities;

  • Financial – I don’t have enough
  • Knowledge Based – I don’t know what I am doing
  • Health – cognitive issues
  • Impulsive –
  • Over confidence – doing the wrong thing in the moment
  • Under confidence – leads to loss of returns over time

Can all be detrimental to making better money decisions

Misalignment of values

How do we identify our behavioural vulnerabilities?

How do I get the emotional comfort I need at the lowest cost way to my financial returns?

How to use the knowledge around your behavioural vulnerability?

Changing our environment to suit our behavioural vulnerability

Conclusions from the Guys


Greg Davies founded the first behavioural finance team at Barclays Bank in 2006 and is a specialist in behavioural finance and decision science. He now works at Oxford Risk building tools to improve financial decisions.

Want to know more – connect with Greg on LinkedIn


Transcript:

>> David Lloyd: Welcome to another one of our, financial well being podcasts. If you’re a regular listener, you’ll know what they’re all about. If this is the first time you’ve ever listened to one, you’re about to find out what they’re all about. My name’s David Lloyd. I’m a, now kind of semi retired writer and broadcaster and actor, and general bon vivo and man about town, or in fact man about the small village where I live. And also living in that village is my good friend Chris Budd. Chris, who are you and how are you relevant to this podcast?

>> Chris Budd: How am I relevant is a question I ask myself every morning when I wake up. David, what an existential opening to the, to the whole thing this is. I think today I will say that I am the man behind the Financial Wellbeing Pulse measurement, tool for financial advisors and planners to measure their clients financial well being. Because two things, you are what you measure, you focus on what you measure. And secondly, by measuring your client’s relationship with money, you can track their progress and therefore the impact of your advice, which you can then tell the FCA about for consumer duty purposes. So if anybody’s interested in the Financial Wellbeing Pulse, then the website would you believe is Financial Wellbeing Pulse. How clever is that?

>> David Lloyd: You’re very, very.

>> Producer Tommo: I think the listeners may have been. It’s probably worth saying that there are many of you out there who have, who don’t work in financial services, but there are some that do. So we do sometimes want to steer financial professionals in a more positive direction where possible.

>> Chris Budd: But also that the non financial professionals, I want them going to their financial advisors and saying, can I take the Financial Wellbeing post please so their advisors can get in Dutch.

>> David Lloyd: And that other voice that you heard butting in rather rudely I thought actually. Who are you? Disembodied voice.

>> Producer Tommo: Who am I? yeah, Tom Morris. I don’t live in the same village.

>> David Lloyd: They wouldn’t allow you?

>> Producer Tommo: No, they wouldn’t. You two are South Bristol. I’m North Bristol, which I’m the right side of the tracks. and yeah, a chartered financial planner at, and director over at Ovation Finance who support and sponsor this podcast. And yeah, just a busy dad well into the swing of the rugby season. So a couple years ago I started coaching my son’s rugby team with. Well, I’m not the head coach. I stepped in and helped the head coach and there’s a group of four or five of us who do it. 25 kids on a Sunday morning running around and playing the sport that I’m so passionate about. And yeah, why am I saying this? Go play rugby.

>> David Lloyd: Yeah, yeah, passionate about. Now, Chris and I, when our kids were younger, did the same with cricket. you know, we used to coach cricket at our local, at our local club and I think this, it’s just great. It’s a lot to be said for chance to spend time with your kids, although my son didn’t stick with this cricket for very long. But it’s a chance to do something for your community as well and I think that’s clearly something that we’ve all shared.

>> Producer Tommo: You’ve nailed it. So there’s here’s to actually link back to this podcast. Something that can enhance one’s well being is an involvement in the community. And on a Sunday morning we definitely have that vibe and feel and I find it just gives me a massive battery energy boost. Ready for the. Ready for the week ahead.

>> David Lloyd: Brilliant.

>> David Lloyd: Well, that’s enough mutual back slapping for now.

Greg Davies is head of behavioural innovation at Oxford Risk

Chris, what’s on today’s podcast today?

>> Chris Budd: David, we’re going to have a listen to my chat with Greg Davies.

>> David Lloyd: Hang on a minute, M. He’s been on before, hasn’t he?

>> Chris Budd: Has. He’s a lovely man. he is head of behavioural innovation at Oxford Risk, which is a company that does technical technological solutions for behavioural finance stuff. And he’s a very, very smart chap looking particularly in things like decision science, how we make financial decisions and how our behaviours affect our financial relationships. So really interesting guy.

>> David Lloyd: I should look forward to this very much indeed. But before we do that, of course we have to do the main feature of the podcast that people tune in week in, week out for, which is Titus Tomo.

David shares a financial tip with TightassTommo about saving for a new bike

I haven’t got a TightassTommo tip today. Before we get the expert on. Have you got one, Chris?

> Chris Budd: I do actually. It’s a bit of a sensible one. It’s a financial well being Y1 I was talking to somebody over the weekend who was saying that they really wanted to buy themselves a new bike. Now they’re very good mountain bike. when I say new bike, their new bike costs more than your car probably, David. And so he had to save up but he wasn’t, he wasn’t kind of motivated, he just wasn’t putting the money away.

And we were just discussing this whole thing about motivation for saving and I suggested to him that he should set up, a new account because it’s very easy to set up lots of different accounts online on your phone these days, isn’t it, with different banks or with the same bank and give it a name. Call it the My New Bike account.

It’s an expression or a behavioural trait we have called mental accounting that if you can picture something, if you can see it, if you can relate to it, you’re more likely to do something about it. So by giving this little pot of money the name My New Bike Account, he’s more likely to put money into it and therefore get his new bike.

>> David Lloyd: Very, very interesting. That’s a good one. Yeah, I’ve done that. Sometimes we’ve got little joint savings account that we have and we call it our fun pot, you know, and it is for holidays or, you know, just something we go. We want to do that thing that’s fun. And, so. So whenever we’ve got a bit of spare cash or, you know, we just put it in the fun pot and then. And then systematically raid it, which we’re about to do because in three days time we’re heading off to Tenerife 10.

>> Producer Tommo: I’m going to smile because he’s actually taken on board some of the stuff we talked about in our planning meeting. So, yes, well done, David.

>> David Lloyd: You get a gold star with you. It was all me. It was.

>> Producer Tommo: I was your. No, I will give it you. It was what worked for you guys, but you’ve actually implemented.

>> David Lloyd: It was indeed. Thank you very much to the sound financial advice that I get from, Tom Morris and Evasion Finance. Other financial services are available, but they’re all crap. So,

> Producer Tommo: Right, what’s mine? Oh, mine’s. Oh, it’s so sad. It’s so boring and it’s a little bit like first worldy problem stuff, but it might be useful for some listeners. And this is going to be a growing, growing trend. So electric vehicles are becoming more and more popular in the UK as, there’s this drive towards net zero. It’s going to take a long time for it to be, you know, the complete car market to be.

Or a larger proportion of the car market to be electric. But there may be those already thinking about, already have an electric car and, please, please, please make sure you’ve got a smart metre at home. If you get a unit put on at home where you can charge at home.

>> Chris Budd: My records have arrived.

>> Producer Tommo: You’re joking. You’ve got more records have arrived?

>> Chris Budd: Oh, yes.

>> Producer Tommo: Literally every episode. Sorry, carry on.

>> Chris Budd: just hurry up with the blooming tip, Domo, because I’ve got things to do.

>> Producer Tommo: Now, if you didn’t hear that, there was. There was a doorbell ringing.

>> David Lloyd: Listeners.

>> David Lloyd: Chris has got a little doorbell button underneath his thing. He wants to impress us with all the records he claims he’s buying.

>> Chris Budd: Or if I’m bored with the story, I just press the doorbell noises. They’re right. Come on, hurry up.

Make sure you’re on a dual tariff or an evening tariff

>> Producer Tommo: All right, so look, if you’ve got this charging unit at home, get it. Make sure you have a smart metre and make sure you’re on a dual tariff or an evening tariff, a different, tariff. Because what I mean by that is our electricity bill between the hours of, say, midnight and five in the morning is a quarter of the cost than our daytime.

>> Chris Budd: I didn’t know that.

>> Producer Tommo: And it’s a deliberate. It costs us a little bit more on this tariff to have the daytime, but because most of about half of our electric is actually spent on charging the car, we are saving. Maybe say, I think I did a calculator somewhere, like 600 quid a year or something like that by. By making that change. So be deliberate. If you’ve got an electric car about when you charge and the tariff you get from your electric, your electricity company, really, really helpful saving, that’s.

>> David Lloyd: That’s great advice. I can add another tip on top of that, actually. My son has an electric car and he always charges his car at work because they have free charging at work.

>> Producer Tommo: Well, there you go. That’s the ultimate tip at all.

>> David Lloyd: I think you need to have a word with your employer, Tom.

>> Producer Tommo: I think so. It’s almost like never have a cup of tea at home, always have it in the office, you know, that sort of thing. Showers. You got showers in the office. Go, do. Go have your showers there.

>> David Lloyd: Exactly. So lots of top tips there from us today. So, let’s move on now then, to the, main event, which is Chris’s interview with Greg Davis.

Greg Davies is an expert in behavioural finance and behavioural economics

Not the big, very tall comedian Greg Davis, I should stress. This is another guy, isn’t it?

>> David Lloyd: You.

>> Chris Budd: It’s all big and very tall as well, actually. But no, not the comedian. And he’s also quite fun, but he’s not that comedian, Greg is. He actually founded the world’s first behavioural finance team at Barclays bank in 2006 and has been at Oxford Risk for a little while, is an expert in all things behavioural. So let’s just not listen to me. Let’s listen to him instead. Let’s listen to my interview with Greg Davies.

Greg Davies is the founder and CEO of Oxford Risk, a behavioural finance company

Greg, thanks so much for joining us on the Financial Wellbeing podcast.

>> Greg Davies: Absolute pleasure Lovely to be here.

>> Chris Budd: again, of course, second time. Not many back many years though.

>> Greg Davies: Many years have passed in between. Yeah.

>> Chris Budd: So, in that time I’d like you to just give our listeners a little flavour of what you do these days at Oxford Risk, because I can’t honestly say that I fully understand this, so I’d like to hear it from you.

>Greg Davies: Well, I might be in the same position. Yes. So, you know, like, like always, I still specialise in applied behavioural finance. So taking ideas from academic decision sciences and behavioural science etcetera, and using it to help people make better financial decisions. But specifically at Oxford Risk, what we are doing is building these ideas into technology.

So we are primarily a software or a technology company, that is building technology, to help advisors and to help end investors to make better decisions by understanding their own financial personality more deeply and by being able to use that understanding to change how they make decisions or change their, their investing behaviour.

>> Chris Budd: Okay, lot of, lot of terms there. There’s two that I’d like to explore. Maybe in the same answer. I don’t know. Okay, be the decider. I’d like to explore what a better financial decision is and I’d also like you to explain what you mean by financial personalities.

Greg Davies: Okay, first one, very good question and not that easy to answer actually. and yeah, and a very important one because if we’re going to use behavioural science, it can be used obviously like all tools for good or for evil. and you run the risk of facing all sorts of accusations, of manipulating people.

So we are very clear and transparent. we have an ethical framework for how we approach applied behavioural science and that notion of better really is at the heart of it. Because unless I can have an idea of what better is, how do I know that I’m guiding people to something that is, that is useful?

Now it is interesting because one definition of better is, the whole traditional framework of what classical finance theory tells us is rational or the right thing to do. and to some extent that is important because although none of us are this hyper rational individual of classical economic theory, in many ways it still describes something that we should aspire to approach.

You see, a lot of behavioural finance goes, well, people don’t behave according to these rules of classical economics. Let’s throw all that out and we’ll focus on how people actually make decisions. I think that’s wrong. We can’t throw it out. We’re throwing the baby out. With the bathwater.

At that point we have to hold on to a lot of the framework of classical economics and classical finance thinking and establish certain rules from that that go. We know that real humans don’t ever quite get there. But there’s a lot in here that we should aspire to in order to help us define what better is. So for example, the notion of risk adjusted returns. If I am going to take extra risk, I should be paid for that risk or I should be expecting to get a better return, I shouldn’t take on risk.

>> Chris Budd: Otherwise you won’t take the extra risk.

Greg Davies: Yeah, exactly, I shouldn’t. So that is one thing where we can say, okay, if I am taking on risk without any reward for it, then that’s definitely not better. So if I’m helping people to get closer to that, then that’s one way of better which brings into play things like diversification. If I’m helping people to be more diversified, if I’m helping people to stick with their investments for longer and not panic along the way and not make emotional knee jerk reactions.

All of these are things that we can go. If I’m moving in that direction, then I’m comfortable that I’m moving people in the direction of better, in the direction of a good decision.

And then there’s a bunch of stuff that’s more marginal. We’re not here to tell people, for example, what risk level is right for them. well, maybe for them, but it’s a very personal thing. So what risk level is right for you might not be the same risk level that’s right for me. I can’t say one is better than the other. What I can do is I can help you to understand your financial needs and your emotional and behavioural needs and help you to arrive at and establish an idea of what better is for you. Yeah, that’s quite a long and fairly rambly answer. But I think.

> Chris Budd: No, no, it’s, it’s, it opens lots and lots of cans actually that I don’t want to get too distracted by. But I can’t help but one or two of them because a lot of the, a lot of the behavioural stuff that I’ve seen over the years has focused on how to use behavioural finance to get better investment returns, which I think is a little bit like learning to play the piano in order to then break it up and use it for firewood.

Right. it’s missing the point. It’s better. Surely. Better financial decisions are ones that make the Simplest of terms makes you happier.

Greg Davies: Yeah. one thing classical finance theory says we should all maximise risk adjusted returns. We should seek the best returns we can get relative to the risk that we, are prepared to take along the journey. From a very narrow perspective, if I am getting better returns for the same risk, yes, I’m getting better.

But a behavioural overlay on that, and this is a slightly, sound bitey phrase, but I often say we should not be chasing risk adjusted returns, we should be chasing anxiety adjusted returns. Because what most people really want, they want to get the best financial returns they can have, not relative to risk, because it’s a very abstract technical concept. Most people don’t, they only care about it in a sort of second order way.

What we care about is my ability to sleep at night. what is the best returns I can get relative to the, the stress, the discomfort, the anxiety that I’m going to have to endure along that investment journey. And if I can get better returns for the level of discomfort I’m capable of enduring, then I’ve got a better portfolio. But if I end up having to take an awful lot more stress just to get slightly better returns, that’s not necessarily better at all.

>> Chris Budd: I, work with somebody, so I do some coaching with people and I’ll change the details because it obviously don’t want to identify them. But the concept is that this guy has got quite a lot of money. In fact, he’s got way more money than he can ever spend in a lifetime. And I’ve just asked the question of him, why have you got an investment portfolio? Why are you taking investment risk? Well, so I can get better returns on my money. But you don’t need any more money. Family don’t need any more money. because he’s already given lots away and everybody’s secure.

Building up your wealth actually builds resilience, says Jonathan Frankel

why does risk fit in there?

> Greg Davies: Yeah, I mean, this is a perennial difficulty. If people don’t need more money, should they take the risk? and I would argue there are a number of reasons why we should take the level of risk that we are willing and able to take. If you take more than that, it’s uncomfortable and it’s dangerous and we shouldn’t do that. If you take less than that, it’s not obviously apparent that that’s worse. But what it does mean, even if you never need the money, and by the way, we never know that we don’t need the money because we don’t know what’s going to happen in the future.

So building up Your wealth actually builds resilience. It builds, you know, it builds your ability to deal with uncertain circumstances in the world with, changes in your preferences. You know, who knows what might happen in your health situation or your family situation. So, refusing to take risk, when you can take risk, and when you’re comfortable taking that level of risk, you’re sort of sitting on money doing nothing. And you might argue, okay, I don’t need to. I would say it’s still better to take some of that risk because you are, you’re building your resilience, your financial resilience. there’s another angle to this, which I confess I’ve never been that successful, persuading people of.

>> Chris Budd: But give it a go.

>> David Lloyd: Well, in a way, you know, if you, if you’re that wealthy, to sit on money doing nothing, that you don’t need to be doing nothing because it’s not like you desperately need that emotional comforter, et cetera. It means that you are sitting on capital that you’re not allowing others to put to productive use. So there is, I think, a, ah, sort of a collaborative, communal way in which rich people by investing are actually, they’re re injecting that capital into the economy. and you could, if you were minded to say that sort of almost leads us to a moral imperative to take a certain amount of risk or the amount of risk that we are willing and able to, because otherwise you’re just sitting on it.

>> Chris Budd: I think that’s, I’m persuaded, but I think that’s perfectly reasonable. I think the answer might not always be to therefore invest. Could be charity and it could be other things, of course. But no, I think that’s a very fair response.

Financial personality is any aspect of your personality that affects making financial decisions

So let’s go back to that, let’s go to that second of the phrases that you use in, financial personality. What do you mean by that?

>> David Lloyd: Ah, so I mean here any aspects of your personality that are relevant to either how you make financial, decisions or to what makes you comfortable or uncomfortable with those financial decisions. And again, setting up classical finance theory as our straw man here. Classical finance theory does make space for personality differences, but only in one very narrow way. It says you and I could have different degrees of risk tolerance. And once I know how your risk tolerance differs from mine, that’s all I need to know because then I can draw a whole bunch of complex charts and I can pick off the point on the efficient frontier that’s right for you and the point that’s right for.

>> Chris Budd: Me and the Manhattan skyline and all those things. Yeah, yeah, yeah, exactly.

> David Lloyd: And apart from that, any differences between you and me are irrelevant to what should be the right answer for investing. What I mean by financial personality is yes, that’s still there. Risk tolerance, my long term rational willingness, to take risk over my total wealth, that’s still there and it’s still important. But you and I differ on a whole raft of other personality dimensions which change both, the right answer for our investing activities. So we’ll have, even if we’re financially exactly the same situation, we may still have different, right answers for our portfolio, our level of risk, et cetera. but it also changes how we’re likely to respond emotionally to events along the way. So for example, if risk tolerance is my cool, calm, collected, rational, if you like long term willingness to trade off risk in return, probably the most important second scale there, that personality scale is composure.

To what degree are you likely to be anxious, or emotionally involved in the journey rather than the destination? And you can have two people who have exactly the same long term willingness to trade off risk in return, one of whom is very able to just ride out the ups and downs along the way and another one who emotionally feels every single bump in the road. So that would be one aspect of financial personality, but there are others. Things like your confidence levels, your comfort, making financial decisions, your impulsivity.

These things become very important in retirement. For example, are you an impulsive spender or not? things like your degree of financial comfort. Are you someone who is subjectively comfortable about your financial situation or, or you tend to worry about your ability to fund your future goals. So all of these are different aspects of financial personality that make one person different from another and therefore mean that you should either communicate with those two people differently or they should have a different portfolio or different advice or different recommendations.

>> Chris Budd: I Remember in, 2020 when the COVID pandemic caused a stock market. I’m loathe to use the word crash because we all know that it bounces back. That’s how stock markets work, generally speaking. But I was on a call with a bunch of advisors in a webinar and we were talking about risk and I said one of the questions you’ve probably asked your clients and your risk questionnaire is if the stock market goes down by 20%, how would you feel? Well, it just has. So why don’t you ask them how they’re feeling? And one of them came back to me and he said, I did that. And the answers I got were completely different to how they’d completed the questionnaire.

>> David Lloyd: Yeah, yeah. I mean that is a prime example of exactly sort of question that you should never have in your risk profiling questionnaire because it asks people to put themselves emotionally in a situation they’re not in. And we’re actually very bad at assessing our own emotional responses to stressful situations when we’re not in a stressful situation.

>> Chris Budd: Yeah. But does that also tell you something about the financial personality of those people? It’s much more than your original guesswork the risk questionnaire would have done, you know.

>> David Lloyd: Yeah. So, but that tells you much more about your, I would say your composure levels than your risk tolerance levels. And the two are both important in their, in their own way. So. Yeah.

>> Chris Budd: So the attitude to risk question I was telling you about, in theory, your attitude to risk. But, but by asking more questions when things actually happen, you can get more information about somebody’s financial personality.

>> David Lloyd: Absolutely. And by the way, just, just as an aside, we, we would always talk about attitudes to risk because there are many. It’s not just one thing. I will have an attitude towards long term risk. In the big picture, I will have a different sort of attitude towards short term trading risks, et cetera. So it’s a collection of things.

>> Chris Budd: Yeah. Yeah.

Behavioural vulnerability is one of the things that shapes our financial personality

Okay, so, the thing that, the phrase that I’ve heard you use before, which I want to get into this while we’re really talking is this phrase behavioural vulnerability, and how that is one of the things that shapes our financial personality. So explain what that phrase means.

> David Lloyd: Yeah, so when I talk about multiple dimensions of financial personality, with many of them there’s no right place to be. You are who you are where you are. But for many of these dimensions there are zones that if you are in that particular zone in certain circumstances, it will make you m more likely to make decisions that could be detrimental to you, that could lead to poor outcomes. So for example, if you are an exceptionally low composure individual, it leads to more anxiety in stressful market conditions and that can lead to more knee jerk, responses, selling at the bottom, in a panic, et cetera. So that is one sort of. If you like behavioural vulnerability, we would distinguish many different types of vulnerability.

There’s financial vulnerability, I don’t have enough money, my expenses are too big, et cetera, et cetera. There’s a vulnerability of capability and knowledge and experience. I don’t know what I’m doing, I don’t know what the right answer is. I don’t agree that markets can go down as well as up. So I end up making poor decisions because I don’t know enough. there is of course vulnerabilities of health, early onset dementia, all of these cognitive vulnerabilities that are much m more about my physical state.

But a behavioural vulnerability is identifying a susceptibility towards patterns of decision making or patterns of behaviour that could be detrimental. Very low composure leads to anxiety which can lead quite easily in the wrong circumstance to poor decision making. Very high impulsivity would be another one. If I’m an extremely impulsive person I tend to overspend far too easily. That’s a form of behavioural vulnerability.

>> Chris Budd: Overconfidence. Overconfidence.

>> David Lloyd: Yeah, overconfidence and underconfidence.

>> Chris Budd: Yeah, yeah.

>> David Lloyd: So they both can be indicators of vulnerability in different ways. So overconfidence, people who simply are far too willing to gamble on a whim that they have because they assume that they’re always right.

>> Chris Budd: Yeah.

>> David Lloyd: underconfidence tends to have a. Overconfidence tends to lead to very potentially big costs because you do the wrong thing in the moment. Underconfidence tends to lead to a prolonged series of smaller costs because people tend to underinvest. They don’t get involved. They’re sitting with their money in the bank account, savings account earning absolutely nothing year after year. So underconfidence tends to lead to a loss of long term returns because you’re doing too little. Overconfidence can very easily lead to a ah, loss of returns because you bet the farm on the wrong thing.

>> Chris Budd: Yeah, yeah. what about. And I, I don’t know if I’m. Well I’ll just come out with it and let’s see where it goes.

Values, Misalignment of values. So one of the things that I see a lot in financial

Values, Misalignment of values. So one of the things that I see a lot in financial the financial world is the assumption that more money will make me more happy.

>> David Lloyd: Yeah.

>> Chris Budd: and sometimes that’s true, especially if you don’t have much. But quite often when you have quite a lot already, more money isn’t going to make any difference. There are other things that are going to add to your. So could that be a behavioural vulnerability?

> David Lloyd: yes, it is less easy to measure in the sort of psychometric way that we approach these other things. We have done a lot of work measuring values when it comes to questions about aligning a portfolio to your values. Sustainability for example esg. Ah, story. and that is true. It’s something that can make people, substantially more comfortable with the same financial situation if they get. You could almost think of these as emotional returns. I might get the financial returns of risk, return, trade offs, et cetera. A lot of people, as you say, either aren’t that interested in that or don’t necessarily need it, but might find quite a lot of value, or happiness or meaning in investing in things that are important to them or aligned, ah, to their values.

I think a lot of the values question there has less to do with investing and what I invest in and more to do with my thoughts of what I’m doing it for and my spending and how I. How and where I gain my sense of purpose and value from. And I think you’re absolutely right. Far too many people, well, arguably we are emotion. Are evolutionarily wired for this because as humans, we are a social species and we, like it or not, are constantly comparing ourselves to other people. you know, there are all these studies that, it doesn’t actually only happen in humans. It happens in a lot of animal species as well. But things like being higher status in whatever group you have defined as your group, tends to lead to more emotional comfort, but also tends to lead to all sorts of health benefits. You know, people who are, you know, who feel like they are more comfortable in terms of their level in a hierarchy, will, have greater longevity, better health, et cetera, et cetera.

>> Chris Budd: Interesting. Sorry, didn’t mean to interrupt it. Interesting. You say comfortable with their level in a hierarchy doesn’t mean being at the top. It means being comfortable with where you are.

>> David Lloyd: Yeah. Although I think, the implication of this is if you’re too far down, it’s very difficult to be comfortable there.

>> Chris Budd: Right.

>> David Lloyd: So you’ve got to be. But what is interesting about that is where you are depends on where you draw your circle. This is, the thing. I can be in exactly the same situation if I surround myself by other people, who. If I surround myself by Joneses I’m always trying to keep up with, I’m going to be miserable. Whereas if I take myself out of that environment and go somewhere else where actually I might. There may be absolutely no difference in my situation, but I just remove points of comparison. Then I can be more comfortable and more happy. Yeah, I think we saw some of this in Covid. You know, some of the things that people found when, you know, moving out of the city, being able to work remotely, some of what that did, and it didn’t work for everybody, but Some people found that in moving away from the maelstrom of, whatever their job situation was and putting themselves in a quieter environment, actually they found that they were much more comfortable and much more happy in that environment.

>> Chris Budd: Eleanor, Roosevelt, was it somebody who said, comparison is the thief of joy? Favourite phrases.

Oxford Risk uses financial personality assessment to identify behavioural vulnerabilities

So sorry I slightly took us off the main behavioural vulnerabilities. Things like being a worrier, being impulsive, having anxiety. So how do we identify our behavioural vulnerabilities?

> David Lloyd: Well, I suppose you could come to Oxford Risk and nicely done, sir. Use our financial personality assessment. ah, I mean, there are psychometric. And that’s what we specialise in doing, is building tools that statistically isolate the questions that enable us to score you. And we’ve got data on tens of thousands of people around the world, so we can place it very precisely. But I think what’s important firstly is really just understanding the dimensions. A lot of this you can assess to some degree, introspectively. and this is one of the places where I think the classical finance textbooks, et cetera, don’t do us any favours because they ignore all of this. They put it on the side and they say it either doesn’t matter or even worse, it’s irrational and therefore silly and stupid to be considering aspects of personality that are not related to risk tolerance. But once I understand, for example, that there is a key distinction between my risk tolerance and my composure, and that, you can have people in all four combinations.

There are obviously people who are high risk tolerance individuals. They’re high risk takers for the long term and are also quite, composed through the ride. And you get people who are low risk takers and are not particularly composed, but it doesn’t matter too much because they’re not taking that much risk. But you get the other combinations as well. high risk tolerance, people who are low composure and they want. They aspire to high returns. They want to take risk in the long term but find it very emotionally uncomfortable as they go through that journey and being able to.

>> Chris Budd: Are they not wrong? We’re trying not to be judgmental here, but if you’re somebody who thinks that you like high levels of risk but it causes you anxiety, surely you’re wrong about your high level of risk tolerance.

> David Lloyd: I see. well, the trouble here is that there is a distinction, as we know, and you pointed to it already when you said the COVID crash. It’s a bounce. If I take a very logical perspective and I know that in the long term A crash is not a crash, it’s a bounce, it’s a step back, et cetera. It’s quite possible for me when I’m, when I’m not in that moment, wearing my logical hat to go, it is perfectly reasonable and rational for me to take a high level of risk because I know that financially I can hold out for the long term and I’m willing to take the risk return trade offs that that portfolio will deliver to me in the long term. However, the, the other hat, the short term hat of living through it is, I find it very difficult to do. So now you’ve put your finger on something that I think is very important here. How do we determine, therefore what is the right answer for that person? The traditional classical finance perspective would go, well, the right answer is your long term answer, just your emotions are stupid, turn them off. You know, that’s just you being silly.

The other end of the spectrum, a completely behavioural answer would go, ah. The other extreme would go, well, if you’re really uncomfortable, then just don’t take the risk, just sit on cash, just don’t do it. I think that what we are aspiring to do is to say the right answer is somewhere in the middle. Okay, you can be more comfortable by taking less risk, but that’s often a relatively costly way of buying emotional comfort. There are cheaper ways of you becoming comfortable. So if you still take the long term risk but you don’t log in to see the value of your portfolio that often, you watch the financial news a little bit less. You, I don’t know, don’t surround yourself by quite so many aspirational money grabbing individuals who are telling you how good their investments have done. There are various ways of assuaging your need for, emotional comfort and composure without the big financial costs that come from stepping away from risk completely and the right mix, there will be different for different people. But I would say that going to either extreme is wrong.

Either going, I will just try to do everything perfectly, in an uber rational kind of way and chase the highest possible returns, or I will just pull away because I’m uncomfortable. The question is not, is it logical for me to need emotional comfort? We all need emotional comfort. The question that follows from that is how do I get the emotional comfort I need at the lowest cost way to my financial returns? Or that’s the question that we as advisors should aspire to be giving the answer to.

>> Chris Budd: Yeah, so let’s try and answer that in just a second to round off. But I would just perhaps just make the observation that your two extremes, you quote there, there is also an element of what you need. I mean, kind of touching on my point earlier on really that you’re making an assumption, understandably, but I just get it, bringing it out that there is a need to get investment returns. If you don’t need investment returns and you’re low, which way are we? Low composure, high anxiety, then don’t invest at all. It’s okay, you don’t need to, so, so there is that underlying kind of assumption. So, so let’s just round this off then by answering that question. How we use we go through one of your profiles.

How do people use financial personality assessment to make better financial decisions

by the way, can people go to Oxford risk for a profile or do you only get them through financial advisors or through.

>> David Lloyd: At the moment, only through financial advisors. Although just recently we’ve been talking about putting a version, building a sort of version that we can put up on our website so that individuals can go through it. and we haven’t managed to get there yet. But I think we should do that because it’s you know, it’s something that’s really interesting for people, for many people to try.

>> Chris Budd: Yeah, absolutely. Keep us informed on that one. it might be something the Institute for Financial Wellbeing would be interested, for example, in promoting psychometric test. So somebody, let’s say hopefully gets through a financial advisor and can do that test. They understand, more about their own areas of vulnerability. Now we come to the final bit which is a so what bit? How do they use that knowledge to make better financial decisions?

>> David Lloyd: Okay, so we could spend several podcasts just on that question. but the first one is, some is determining the right level of risk overall. if your long term risk tolerance says shoot for the stars, but your composure is really low, there’s some degree to which you pull back. Again. our suitability software will say here’s the right level of risk for your particular mix of behavioural vulnerabilities and risk tolerance. But effectively what you’re saying is risk tolerance gives you your starting anchor point. Then of course we mix in risk capacity. So your need and your financial ability to take risk. And then things like composure or your behavioural vulnerabilities should cause you to pull back just slightly, not all the way back. But the lower your composure, the more stressed an individual, the more you pull back. We don’t recommend necessarily pulling back too far because of those things. Because there are better ways of, of getting emotional.

>> Chris Budd: There’s Education involved in that with the sort of things that you were just talking about.

> David Lloyd: Exactly. So the secondary strands are really about education, engagement, communication, or delegation. You know, merely the fact that not for everybody but using an advisor or you know, the, the phone, a friend. Sharing the emotional burden of decision making with someone else is something that for many people gives them enough emotional comfort to get invested and stay invested. So there is a whole raft of things. First, informing yourself more, secondly, delegating or sharing the burden with someone else or with an advisor. and if you are doing that how you engage, either how your advisor engages with you or how you allow yourself to engage yourself. And this is things like turning off the information tap or the information fire hose. We all become much more anxious if we are monitoring things more frequently because the smaller the time slices I divide my world up in M, the more times I’m going to see something flashing red. If I monitor my portfolio, I’m just looking at rolling five year horizon of my returns.

It’s quite possible that my portfolio will never dip into to red over a rolling five year horizon. If I look every morning to see how it did since yesterday, I’m going to be seeing about 50% of the time a red number. So how we construct our environment becomes very important in terms of managing our emotional state. So there are a whole lot of behavioural tools and techniques that we can use once we understand our financial personality that can help us to control our emotional state. We’re not changing our personality, we’re more changing our environment in order to suit our personality. So information flow, things like always building a pause point into decisions that you make. If you’re making decisions always, at the very least go and make yourself a cup of tea before you push go on the trade. If you’re trading or investing or walk around a block.

>> Chris Budd: I buy a lot of vinyl records Greg. And I do exactly that. I shovel it into my basket and then I leave it to the next morning and I go what on earth am I trying to buy that for?

>> David Lloyd: I use this religiously with my, with my kids because I don’t know if you, you go into any shop with children and they oh, I want that one. And it’s all they’ve ever wanted and they want it right now. And I just, my, my, my usual default position here is you know, okay, well come back in a week and tell me that you still want it. And very few, very few occasions do they remember what it was they wanted a Week later. Let’s hope they don’t listen to adults too.

>> Chris Budd: Let’s hope they don’t listen to this podcast, Greg, or the cat’s out the bag, mate.

>> David Lloyd: Yeah, no, well, I’ve been very transparent with them. That’s exactly what I’m doing. And, you know, like many behavioural nudges, you don’t have to hide them or do anything underhand or manipulative because most people actually want to be, helped into better decisions and better behaviour.

>> Chris Budd: Yeah, yeah, brilliant, Greg. as you said, we could talk on this for several podcasts, but, I think that’s been absolutely insightful. Thanks ever so much for your time, mate. Really appreciate it.

>> David Lloyd: Absolute pleasure. Thank you so much for having me.

Great. Very good to hear from Greg again. I think he’s great. I’ve seen Greg talk a few times

Great.

>> David Lloyd: Very good to hear from Greg again. I mean, he does know his stuff, doesn’t he? And he does open up lots of interesting ways of looking at things that we thought that we knew about. And my big takeaway from that, that really chimed with me. The thing is that there are, there are lots of different right answers to a financial dilemma. And that the key to what makes that a right answer is, is it depends very much on your emotional attitude to life. And the recognition that everybody is emotionally different means that you have to come at trying to resolve their issues from a different direction. And therefore, there are, as I said at the beginning, lots of different right ways of doing it, but no one single right way of doing it. Yeah, yeah, yeah.

>> Producer Tommo: It’s just fascinating, isn’t it? It just shows how complex the human mind is and, trying to get good financial outcomes. You know, you need to be aware that this stuff is going on. I think my big tip from listening to that episode is, or that interview is go back and listen to it again. And the reason I say there’s a lot in there, a lot of brilliant stuff in there, but it’s it, it is involved, right? It’s, it’s it. He is trying to talk about something that is a very new area of, of, of discussion for people in finance, for people, for humans in general, trying to understand how their biases work. So go and listen to it again and it will start to resonate more and more and you’ll start to pick up the, the themes that he’s talking about.

>> David Lloyd: emotion is a very big thing, isn’t it? Sometimes we get blindsided by people’s emotional response to something. But what he’s saying is that there is a way you can then find out how you can control that emotional state, not in a Bad way. But just by analysing it sometimes in a little bit more complex way than we might normally do. Yeah, I found it absolutely fascinating.

>> Chris Budd: I’ve seen Greg talk a few times and he was one of the very first people I saw talking about years ago talking about stuff that wasn’t your standard financial advice stuff. So he’s one of my without whom people in many ways. And the talk he gave, he gave this analogy of Odysseus the first talk. And I remember looking at thinking this is really clever or this is, I don’t know what you’re talking about but this is really clever. And what he was, the analogy he was drawing was about because he wanted to hear for those that don’t know the Greek, Greek myth.

>> David Lloyd: Yes.

>> Chris Budd: that that Odysseus wanted to hear the song of the sirens. But if you hear the song of the sirens they would drag you into the sea and kill you. But so he couldn’t work out how he could hear this song. So eventually he got himself is meant to strap him to the mast of the ship. Everybody then put, blocked their ears up so that he couldn’t move if he wanted to. And that was his analogy with making financial decisions, put things in place like regular savings so that you don’t have a choice to stop yourself from making bad decisions. And it was a it was a brilliant analogy that on the third time I saw it, it just complete, I got it, you know, and one of the ways that started me on this whole financial wellbeing journey. I think he’s great.

>> David Lloyd: Excellent stuff. Well, I hope you found that interview as fascinating and as indeed quite complex as we did. And as Tomo said, I think be good for you to go back and listen to it again if you’ve got the time. And while you’re doing that, please do like and subscribe in whatever platform you’ve consumed this on, be it Spotify or YouTube or any of the other myriad forms we are available to the world on. And with that long, winded blurb, I wish you all a very fond goodbye and I hope you’ll tune in again next time that we present another one of our financial well being podcasts.

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