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How High Net Worth Individuals Make Financial Decisions

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Written by: Emily Heaton

Many High Net Worth Individuals (HNWIs) work long hours and often have very limited time to consider the long term management of their accumulating wealth.

While everyone can make investment mistakes, bad decisions can be more significant for wealthy individuals.

Understanding how to attract high net worth clients before the damage is done is important to financial services firms.

Digital marketing can help. Let’s take a look.

The Desire for Self Control

When it comes to our finances the degree to which we can control our emotional reactions when making investment decisions will dictate how successful we are.

Whilst we are all individual, research shows that, when it comes to our desire for self control, distinct groups emerge amongst HNWIs.

Those more likely to have a greater desire for self control over financial behaviour:

  • Women
  • Entrepreneurs
  • People who inherited their wealth
  • People whose wealth comes from property or bonuses
     

Those less likely to have a greater desire for self control over financial behaviour:

  • Men
  • Older people
  • People who earned their wealth
  • People whose wealth comes from investments
     

Financial services firms know that patience, continual market study and occasional rebalancing are the keys to creating and managing a successful long term investment portfolio.

Persuading their next clients that working with professionals is critcal to yielding the best results can be a challenge if that client is less likely to have a greater desire for self control over financial behaviour.

8 Concepts of Behavioural Finance

Rooted in psychology and economics, behavioural finance is the study of why people make irrational financial decisions.

Understanding these concepts can help firms to appreciate the seeming contradictions demonstrated by HNWIs.

1. Anchoring

The concept of anchoring is the tendency for us to attach or anchor our thoughts around a reference point, despite the fact that it may not have any logical relevance to the decision at hand.

2. Mental accounting

Mental accounting refers to the tendency for us to divide our money into separate accounts based on criteria like the source and intent for the money.

In addition, the importance of the money in each account also varies depending upon the source and what it is intended to be used for.

3. Confirmation and Hindsight bias

Confirmation bias refers to how we tend to be more receptive to new information that confirms our preconceived ideas about a subject.

The hindsight bias represents how we believe that after the fact, the occurrence of an event was completely obvious.

4. Gambler’s Fallacy

The gambler’s fallacy refers to an incorrect interpretation of statistics where someone believes that the occurrence of a random independent event would somehow mean that another random independent event is less likely to happen.

5. Herd behaviour

Herd behaviour represents the preference for individuals to mimic the behaviours or actions of a larger sized group. Also called social proofing.

6. Overconfidence

Overconfidence represents the tendency for an investor to overestimate his or her ability in performing some action/task.

7. Overreaction

Overreaction occurs when one reacts to a piece of news in a way that is greater than actual impact of the news.

8. Prospect theory

Prospect theory says that people do not feel equal levels of joy and pain to the same effect.

The average person tends to be more loss sensitive, ie he or she will feel more pain in receiving a loss compared to the amount of joy felt from receiving an equal amount of gain.

The Value of Professional Support

Successful individuals believe that they will be successful at just about anything they tackle. 

Yet nearly half of all HNWIs would like to have more self control when it comes to making financial decisions. 

It is important for financial services firms to understand behavioural finance concepts and how they apply to HNWIs if they are to attract them as future clients.

Given that over 80% of HNWIs are online, digital marketing messages conveyed via blogging, offers and nurturing email programmes will be effective.

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