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Behavioural Economics And Wealth Management The Comfort Gap

Dennis Harhalakis

5 September 2018

Behavioural economics may once have been an obscure topic outside academia but it is now quite well understood in areas such as investment and finance. Humans can become over confident or unduly pessimistic, or attribute to skill what in fact was caused by luck. And such cognitive biases are, so it is argued, hardwired from pre-history. But self-knowledge can also help humans overcome such biases, maybe, and avoid falling into some of the traps one sees in investment behaviour. 

A consultant in the wealth management industry, Dennis Harhalakis writes here about some of the uses of behavioural economics that can be applied to wealth management. Harhalakis has worked for firms such as Gulland Padfield and CTBC Bank. The editors of this news service are pleased to share these views with readers and invite responses. They can email tom.burroughes@wealthbriefing.com

The ability to quickly absorb billions of information points from your environment and then have an accurate, corresponding response ready within seconds is an incredibly valuable tool. This is our reptilian brain, which manages the “fight or flight” response, helped keep us alive over millennia, and still drives about 25 per cent of our behaviour. As humans evolved and the brain had more space to grow, we developed our mammalian or emotional brains. The extra space is used to store memories and the emotions associated with those memories. The responses produced by the reptilian and emotional brains are incredibly fast because they carry information subconsciously and do not pass through the thinking brain; together they make up our reflexes and drive up to 95 per cent of our behaviour. The thinking brain developed last and controls cognition, reasoning, language and higher intelligence. 

This brain consists of the frontal lobes or neocortex and, while it occupies about 80 per cent of the overall brain surface area and does most of the thinking, it only drives about 5 per cent of our behaviour. In reality, the three regions of the brain do not operate independently; instead, primal, emotional and rational mental activities are the product of neural activity in more than one of the three regions, and their collective energy creates human experience Greg Davies, Antonia Lim http://www.centapse.com/wp-content/uploads/2016/10/Dont-let-the-best-be-the-enemy-of-the-achievable-2014.pdf