The way we think about investing is changing; we believe that success can’t be understood with just a set of numbers. A discovery process using the cutting-edge field of behavioural finance can help advisors to better understand their clients and what influences their wealth decisionsi. \nCHANGING ECONOMIC THEORY\nEconomists once believed that investors, given the right information, acted rationally in pursuit of their own interests. With the help of behavioural economics, we now know that this is an oversimplification. \nMany investment decisions can be instinctive, with no basis in logic, and many more may only make sense once you understand the unique perspective underlying that decision.\nBehavioural Economics is a method of economic analysis that applies the psychology of human behaviour to explain economic decision-making. Lessons from behavioural economics can be used to create environments that nudge people toward wiser decisions and healthier livesii. \nTraditional economics assumes that individuals are rational decision makers, who are consistent in accurately weighing the costs and benefits of their decisions. As Psychologist and Economist Daniel Kahneman stated, “it seems that traditional economics and behavioral economics are describing two different speciesiii." \nWhen we think about investing we must consider our 'blind spots'; those areas that impact our ability to appropriately assess the costs and benefits of a decision. Knowing and understanding how these blind spots impact wealth decisions is an important step in building an investment and wealth plan that address our needs and goals. An appropriate discovery process using behavioural finance can aid in uncovering these blind spots. \nCOMMON BLIND SPOTS\nFraming Effect\nThe tendency to respond to the same problem differently, depending on how it is presented.\nIs this you?\nYou may respond differently to portfolio performance presented as a % rather than a dollar figure.\nFamiliarity \nThe tendency to over-invest in what you are familiar with.\nIs this you?\nYou may have a tendency to invest more heavily in companies or industries you know (e.g. companies or industries in which you work). This could lead to an overconcentration in a specific sector.\nSensitivity to Noise\n'Noise' is recent information that can tempt you to second guess your established investment strategies.\nIs this you?\nYou may be tempted to make reactionary changes to your portfolio at inopportune times based on noise in the media. These decisions based on noise may negatively impact your portfolio.\nLoss Aversion \nThe tendency to feel losses more strongly than gains.\nIs this you?\nIf your portfolio lost 10% in value, this might generate a stronger emotional response than a 10% gain in value.\nShort Term Focus \nThe tendency to value a reward that arrives sooner and discount a reward that arrives later.\nIs this you?\nYou may have a hard time visualizing retirement income and expenses or have difficulty saving for a future goal.\nOverconfidence \nThe tendency to overestimate your own investment ability.\nIs this you?\nYou may engage in higher trading activity than the average person, which has been shown to lead to lower returns.\n\nTD Wealth employs a discovery process driven by a Five Factor Model of Personality to chart Wealth Personalities - conscientiousness, agreeableness, reactiveness, extraversion and openness - to uncover financial blind spots. \nBEHAVIOURAL FINANCE AT WORK\nA quantitative study was recently completed by TD Wealth focused on the Five Factor Model of Personality. This study produced a number of interesting findings, which can be accessed through the report published online. In the interest of time, I will focus on one cohort for this piece. \nLooking at the findings of investors across varying ages:\nThose aged 18 to 34 were questioning, 'in the moment', and quick to react.\nThe traits commonly associated with this younger group are also the ones most likely to stand in the way of long-term and short-term thinking. With a longer runway to retirement, younger investors can be better positioned to take on risk; however, their tendency to react hastily to market events may prevent them from reaping the rewards that may come from weathering a higher-risk strategy.\nThose aged 35 to 54 were questioning, reflective and calm under pressure.\nOnly 21% of middle-aged investors reported a high degree of satisfaction with retirement readiness, a low number compared to other cohorts. Could this be that middle-aged investors – who may be dealing with busy careers, young children and elderly parents – are more likely to put their retirement ambitions on the back burner? Time management is important to these individuals and communications should be efficient and relevant.\nWhile those aged 55 and up were amenable and confident.\nA greater percentage of older investors in the study were financially confident. This may be a result of having lived through numerous market ups and downs, perhaps making them more comfortable in navigating financial issues. These individuals should ensure they do not get too comfortable as vigilance to the economic environment is important. \nLOOKING FORWARD\nBehavioural Finance can play a significant role in helping an investor to understand their clients more fully and also to help those clients understand themselves at a deeper level. \nIn an increasingly volatile market environment, understanding your wealth personality helps both you and your advisor to develop a path that is appropriate to your needs, consistent with your expectations and can guide you through various stages of life.\n\niThis article includes excerpts from TD Wealth's Behavioural Finance Industry Report: Exploring Wealth Personality (2019)\niiHeshmany Shahram, Ph.D. (2017) What is Behavioral Economics?: Helping people lead healthier and happier lives\niiiKahneman Daniel (2011) Thinking, Fast and Slow, New York: Farrar, Straus and Giroux\n\nTD Wealth represents the products and services offered by TD Waterhouse Canada Inc., TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).