A decade ago, hiring a team of behavioural finance academics to help investment managers mitigate risk seemed an ‘esoteric’ gamble. Now, says Dr Peter Brooks, Head of Behavioural Finance at Barclays Wealth and Investment Management, the bank’s pioneering approach is seen as a safe bet throughout the industry.
“When I joined, it was a pioneering move for a bank,” says Peter Brooks, looking out over the cityscape of Canary Wharf, “and in some ways it still is.”
“Barclays recognised there was this thing called behavioural finance out there and people were starting to think that there was a group of esoteric academic guys who might have some good ideas, but it was a bit of a gamble forming the team. In some ways, we got lucky as a team, because the global financial crisis hit, and probably the one thing that came out of that with more credibility than when it went in was behavioural finance – the idea that markets and emotions are intrinsically linked.”
It was 2007, five years after Daniel Kahneman had won the Nobel Prize in Economics for his work in behavioural economics. Nudge and Freakonomics were hitting the bestseller charts as people attempted to work out new ways of deciphering psychology’s relationship with trade, money and financial decision-making. And Barclays hired Dr Greg Davies to head up their brand new behavioural finance department, working on risk and personality-based advice for their investment management team.
Brooks, with a PhD in Behavioural and Experimental Economics, soon followed, exchanging an ivory tower for one made of glass. On Davies’ departure, he took over the department. “Banks usually have this approach where they tell you what is best, and what they think is best is some definition of what a rational person would do, with all the information, with all the time in the world and with great knowledge,” he says. “That means you should be managing your money perfectly, never borrowing money you don’t need and investing for the long-term, and staying diversified. But actually none of us are like that.”
Behavioural finance concerns itself with eliminating mistakes: “Our approach is ‘if we know there are mistakes, and we know from our understanding of finance the right way to do it, how do we help people de-bias themselves?’ And that’s where the academics come in – we can show the many different ways in which people make mistakes, and create ways of working with people that can make it more obvious what the right decisions are. People have limited willpower and sometimes limited knowledge. It’s our job to find surer ways of customers and clients getting it right.”