After the financial crisis of 2008, regulation has made the use of behavioral finance mandatory for large banks like Switzerland's Credit Suisse and UBS. These and other institutions in Europe, together with many independent financial advisors, are employing the practical tools created by Zurich, Switzerland-based Behavioral Finance Solutions (BhFS).
Founded by three behavioral finance experts and professors at various universities in Switzerland — Thorsten Hens, Enrico De Giorgi and Dieter Niggeler – BhFS operates on the principle that the science of behavioral finance and its practical application in financial planning are inextricably linked in a continuing cycle.
"We use the income raised from the sale of our tools to feed our next lab experiments, which will in turn result in a new set of tools," said Hens, who is the director of the Institute for Banking and Finance at the University of Zurich.
The result of that approach is a series of highly sophisticated tools based on in-depth and nuanced research in behavioral finance, which allows banks and financial advisors to understand their clients' financial decisions in terms of a broad range of factors including gender and culture (Hens and his team studied the behavioral patterns and financial behavior of individuals in 52 different countries).
"Prior to the crisis, it seemed there was a belief that a customer in Switzerland is the same as a customer in China, but this is not at all the case for a number of reasons," Hens said. "For global banks that continue to expand into new markets, it's very important to understand the differences between different countries and cultures, as well as, of course, the differences between individuals."
BhFS works closely with different institutions in Europe – and Hens is hoping that word will spread in the United States as well – to develop and implement a systematic investor profiling method that will enable them to create optimal asset allocation models for their clients.
The company offers three main tools: A diagnostic questionnaire that's custom-made to fit a particular advisory process and is designed to identify the biases and preferences of individuals; a model that Hens likens to flight simulators used by pilots that figures out an investor's definition of gains, losses and risks, and then builds a function that represents the investor's decision-making process; and finally, a tool that determines a particular individual's risk profile and allows for an advisor to create a portfolio that's built for that person.
