Decision Economics

Can understanding how people think and make decisions give you a competitive advantage?

“Intelligence tests measure important things, but they do not assess the extent of rational thought.”*

The field of behavioral finance is now part of the curriculum for many professional designations including CFA, CFP®, and CIMA. Despite that, very little progress has been made in terms of translating its findings from theory to application.

Decision Economics is designed to educate the advisor on the science of decision making with direct applications for managing client relationships and fostering better investment decisions.

Can Behavioral Finance improve investment results?

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Program Agenda

The Decision Economics program is a professional development program designed to translate the findings from the fields of neuroscience and behavioral finance into improved decision-making. This on-line program is approved for CE, including CFP® and includes diagnostic exams and management reporting tools. The program can also be customized, combining on-line and in-person instruction, creating an internal certification program that ensures the training is put into practice.

Course 1 - Overview

The Epicenter of Decision Making; The Brain

Recent advancements in the field of neuroscience indicate that our brains are actually ‘hard-wired’ to process information and stimulate behavioral responses in a manner that may not be conducive to successful investing. These responses are powerful and often generated on a preconscious level, affecting both mind and body. Understanding the neural programming is an important first step in devising techniques and strategies to attenuate the likelihood of investment decision errors.
  • Why we are ‘hard wired’ to buy high and sell low
  • Intelligence versus rational decision making
  • Dual Processing Theory
Course 2 - Understand

Decision Errors; Heuristics and Biases

Cognitive psychologists, including Nobel Prize winner Daniel Kahneman, have demonstrated that our thinking and decision-making is highly influenced by our biases (tendencies) and the use of heuristics (simplification strategies). Research has also suggested that we employ two modes of thinking when making decisions; intuition and logic. The former is fast and efficient and the latter is slower and serial. As you might expect, there is a trade-off between speed and accuracy in decision-making and understanding which is most appropriate in a given situation is critical.
  • Taxonomy of Biases and Heuristics
  • Practical examples of top Biases and Heuristics
  • Attribute Substitution: ‘Lazy Thinking’
Course 3 - Recognize

Top Investment ‘Error Points’

In the investment domain, decisions are made in an environment of uncertainty and most decision errors are clustered in three primary areas. For example, many investors rely on ‘experts’ to assess probabilities and make market forecasts. The question is whether there is true ‘signal’ value coming from experts or just ‘noise’. Further, understanding how capital markets ebb and flow and closely examining ‘conventional wisdoms’ are critical skills necessary to improve decision-making.
  • The inability to capture Mean Reversion
  • Over-reliance on experts and forecasts
  • Uncritical acceptance of ‘Conventional Wisdoms’
Course 4 - Apply

Best Practices to Improve Decision Making

Understanding the findings from Behavior Finance is very different than applying them in practice. Best practices from the Fiduciary field can easily be incorporated in the investment decision process to both mitigate decision errors and improve investment outcomes. Many of these ‘best practices’ are not new and many advisors are already incorporating some of them in their investment decision process. The key to success, however, is the consistent application of them over time.
  • Five Best Practices from the fiduciary world
  • Implementing the best practices
  • Connecting the dots

*Keith Stanovich, the Chair of Applied Cognitive Sciences at the University of Toronto and author of What Intelligence Tests Miss

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We’d value the opportunity to have a discussion with you. Best wishes for 2017!