Tapping Into the Unconscious of the Investor’s Mind
“By understanding their unconscious — and therefore having a more accurate representation of their actual preferred risk level — investors are able to make smarter decisions that will bring greater satisfaction.”
A century ago in Vienna, Sigmund Freud’s insights into the power of the unconscious mind changed the way physicians thought about their patients’ symptoms and treatment. Today, a top-notch team of behavioral scientists in San Francisco are helping healthy investors benefit from Freud’s insights, supported by a deep understanding of modern behavioral finance and how investors make decisions.
Investments are about returns — and the amount of risk investors will accept in order to pursue these returns. An investor willing to enter higher levels of risk is likelier to see higher returns, but also likelier to experience a loss of the investment. Thus financial experts will suggest different investment strategies depending on an investor’s level of risk acceptance.
The naïve assumption has been that investors know what kind of risk taker they are, and that this behavior is stable over time and independent of the situation.
Yet how can an investor’s attitudes and propensities towards risk be accurately determined? Traditionally, this question has been answered by having investors respond to a series of questions about themselves and their risk-taking behavior. The naïve assumption has been that investors know what kind of risk taker they are, and that this behavior is stable over time and independent of the situation.
Wrong, say the behavioral science experts at iMatchative, a San Francisco–based company whose innovative AltX platform connects investors and hedge funds using nuanced behavioral models. Reflecting the experience of seasoned investors, the iMatchative team disagrees in two fundamental ways — and provides a revolutionary patent-pending solution to the shortcomings of the traditional model.
1. Perceived/conscious risk differs from unconscious risk
Perceived or conscious risk-taking attitudes and inclinations refer to what people are consciously aware of regarding their preference for risk — in other words, what they know they want. However, most people also have unconscious preferences that they aren’t cognizant of. When investors unconsciously report how they would like to behave, or how they ideally feel about risk, they paint an inaccurate portrait of who they really are as risk takers. This is why it’s crucial to identify unconscious risk-taking propensities: It gives investors a more accurate vision of their preferences and how to make decisions accordingly.
The behavioral team at iMatchative has developed an innovative way to measure both conscious and unconscious risk tendencies, giving financial decision makers deep and comprehensive insights into their risk propensities. Measuring conscious risk is easy enough using self-reported measures to gauge how clients perceive themselves in terms of their risk taking. Measuring unconscious risk preferences is a bit more complicated, but as the AltX platform shows, it is by no means impossible. Using a timed psychological assessment composed of questions and activities, the AltX platform is able to measure and assess an investor’s unconscious preference for investment risk and investment safety.
2. Risk-taking preferences in calm and deliberate situations may dramatically differ from risk taking in a hot and volatile market environment
It’s an experience shared by many investors: Feeling calm and good about a risk level assumed under steady, friendly market conditions turns into a nightmare when investments drop sharply in a suddenly volatile market.
So when the markets are steady and investors are calm, is there a valid way to predict risk-taking preferences in times of crisis and volatility? Yes, say the experts at iMatchative. In addition to measuring these preferences generally, they’ve designed a test that also looks at how preferences might change in times of high stress or panic, like in the event of a market crash. By comparing these results with conscious preferences, the AltX platform is able to provide enhanced insight to clients.
Why it’s so important to be aware of/account for unconscious risk preferences
More often than not, there is actually a noticeable difference between conscious and unconscious preferences. Recognizing and quantifying this difference means investors have a deeper understanding of their decision-making process, and can use this knowledge to adjust their investment choices accordingly.
Making choices that are inconsistent with one’s true values or preferences can result in great discomfort or even greater disappointment when an investment’s behavior or outcome is not properly aligned with an investor’s risk tolerance. By understanding their unconscious — and therefore having a more accurate representation of their actual preferred risk level — investors are able to make smarter decisions that will bring greater satisfaction.
Powered by iMatchative, a financial technology company based in San Francisco, AltX provides a two-sided data analytics, monitoring, and matching platform that enables intelligent alternative investments through superior insights. Cloud-based, automated, and unbiased, AltX harnesses science and technology, financial and behavioral dimensions, proprietary algorithms, sophisticated analytics, relationship mapping, and targeted news to predict compatible investment relationships between funds and investors. The result is simpler and more effective search and discovery, stickier capital, and more productive and satisfying investment partnerships.