Researchers from the University of Warwick’s Institute of Applied Cognitive Science have devised a new method of obtaining a precise understanding of a consumer’s tolerance of risk. The research can be used to help match consumers with financial options that are closely keyed to the exact level of risk that investor feels comfortable with. This approach runs counter to the current culture which tends to provide conservative solutions to people’s financial services needs. If used widely, the resultant increased level of confidence and risk taking in how people make financial decisions could create a discernible and sustained boost in confidence in a number of financial markets.
This work arises from University of Warwick researchers Professor Nick Chater and Dr Neil Stewart’s development of a new theory of how people make risky decisions. They are now working with fellow Warwick researcher Henry Stott to develop the core idea of this development - that people cannot weigh up the absolute value of various outcomes, and don’t have any absolute idea how likely each outcome is. They tend, instead, to ‘sample’ outcomes and likelihoods from memory, and use these to assess the relative value of the options they are considering. This leads to new explanations for why people are risk-averse, and why they so dislike investment volatility.
The researchers will also develop models of “financial personalities” which will be independent of socio-economic classifications and which give a much better understanding of how people’s decision-making processes work. The researchers will also explore how consumers are influenced by the contexts in which they take financial decisions. This will help people to improve their financial decisions and banks to improve their services.
Peter Dunn | alfa
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