Introduction

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Decision making can be challenging as we are influenced by biases, emotions and irrational behaviour that we may not be aware of; and even if we are aware of them, we may not be able to easily control them. Financial decision making can be particularly tricky. Not only is it hard to construct an optimal financial plan, but once you have one, you need self-control to adhere to it. For many people, such self-control may be difficult to maintain. The classical example of resisting temptations in order to meet long-term goals is illustrated in Homer's story of Ulysses, who had to tie himself to the mast of his ship to resist the Sirens' songs in order to continue his long journey home. Ulysses' brilliance lay in having the foresight to recognise his inability to resist temptation and to take steps to counteract it.

Executive summary 2 of 8 The Role of Control in Financial Decision Making

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Financial self-control is a burgeoning research area in behavioural finance, which combines the disciplines of psychology and finance. A number of studies exist on the topic, though little has been done to understand how rules and strategies are used to remedy failures of self-control. Equally, existing studies tend to be partial to certain demographic groups, and often limited to one country. Little has been done to understand how strategies can be used to remedy failures of self-control in practice, particularly those that apply to the wealthy. In a global investment environment, having a clear idea of the differences and similarities across geographies can be particularly useful to investors and financial services firms.

As a result, this Barclays study undertook ground-breaking research to help better understand how to improve decision making. For this report, we surveyed over 2,000 wealthy individuals, asking them questions about their approach to investing.

Classical finance does not take into account the emotions involved in decision making.

The study was structured to enable us to explore further the issue of self-control:

  • First, we wanted to investigate and understand better how individuals' self-assessments of their investment style relates to aspects of their financial personality, such as "risk tolerance," "composure," and "desire for financial discipline," thereby highlighting certain financial personality traits that run across different types of investors.
  • Second, we wanted to examine how investors cope with these traits - and any associated perceived shortcomings in their investment approach - through the use of investment rules and strategies (in other words, attempts to impose some degree of self-control).
  • Third, we conducted a number of interviews with finance sector professionals, psychologists and other academics, to shed more light on the survey's findings.