Our decisions are influenced by our need for emotional comfort. Understanding what makes people uncomfortable with investing is essential in managing their relationship with volatility.
Investors’ need for emotional comfort is a core part of their psychology. It affects how they preceive risk, the choices they make, and how they respond to changing circumstances. Investors’ day-to-day risk behaviour is much more volatile than their long-term risk tolerance, and emotional comfort is what they need to help them stay the course.
The Oxford Risk approach is based on three core principles of what emotional comfort is:
A collection of psychological traits: measured by robust psychometric tools.
Complex, individual, and unpredictable: a rich behavioural profile informs how investors really respond to a wide range of situations.
Constantly evolving: the need for emotional comfort can change and so should be monitored over the investment journey to guide investor interactions.
Among the ten behavioural traits covered by the Oxford Risk assessment are the investors’:
Composure: level of emotional engagement with the ups and downs of the investment journey.
Confidence: comfort making financial decisions.
Involvement: desire to share the emotional burden of decision making.
Behavioural insights provide an indication of the most likely and the most costly deviations from ideal investing. We all deviate to the ‘comfortable’ rather than the ‘right’ answer when making decisions, particularly under stress, but this often results in sacrificing long-term returns in exchange for greater emotional comfort.
Our emotional comfort assessments help investors to minimise the stress, discomfort and anxiety induced by investing – at minimum cost to returns.
The insights from emotional comfort can be used to manage the investor’s relationship with a portfolio, as well as to guide construction of the portfolio itself. Emotional comfort can be increased by tailoring client communication, for instance by making changes to the layout of investment reports to mitigate the emotional effects of loss aversion.
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