Investment and Risk Tolerance Essay

Question 1 How do the concepts of demeanoral pay make believe opportunities for HelloWall(a)(a)et?The watercourse monetary advising sites such as HelloWallet as well as its contenders, such as Mint.com and Yodlee, provide compute and virtual monetary advising returns based purely on exploiter bank transactions and spend category. The HelloWallet system allows the user to pull in and track customized budget proposal. What is more consequential is that the system burn automatically provide financial advice and manner of speaking tips by use data mining techniques.However, HelloWallet and its competitors do non provide all financial analysis and evaluation based on user demeanor and their psychographic characteristics, such as user character, values, attitudes, interests and risk adjustment in price of allow foringness. These psychographic classifications are extremely relevant with dissembles to individual strategy and risk tolerance. level with the similar b ank transactions data and consumption category, an investor background, past pass, in the flesh(predicate)ity and attitudes can make coronation process unique for apiece individual. With the help of behavior pay theory, HelloWallet can shape up system to fit psychographic profiles to item behavioural investor profile. As a result, a break-dance understanding of user behavioral tendencies of spending and investment leave behind help to provide better financial advice.An easy and quick way is to build online questionnaire to fit each individual into different behavioral investor types. There are several models we can use, Barnewall Two-way model, Bailard, Biehl, and Kariser Five model and Pompian model. We use Pompian models as an example. The major fence for promoting Pompian is becausal agency it is less time-consuming and less complex. Therefore, it will be easy to be implemented on an online system and require less time played out on filling out the hatful (as we point ed out in challenge, it is not an easy task to ask online user to fill out survey with a lot of details).Pompian model identifies quatern behavioral investor types based on risk tolerance and active/passive scale passive renovator, comradely follower, independent individua tip and active accumulator. It is a top down glide path which is more efficient and simple by categorizing users into passive and active, then however break down into four types based on their risk tolerance. With these information, the user of HelloWallet will be categorized based on their investment/spending behavior type. Based on these different types, the system can comfortably provide more tailored investment tips and products to users. For example, once a user behavior type is identified, the system can provide saving and investment tips accordingly.For example, when a user is identified to be a passive preserver whose risk tolerance is low and emotional, the system provides low risk financial product s (excluding high risk ones), e.g., 2-year GICs. In addition, the system can try to incline the soundness of these financial by focusing on elaborate the cultivation of these investment (what the terminate value will be and what type of investors these investments for). If investor nail a long term income urgency, the system can provide financial products on bond index fit their spending goal (contrary to the current systems which spam non-relevant financial products to all the users without differentiate their needs and risk).With the introduce of the behavior investor/user types into the systems, HelloWallet can extend their financial advising service from purely creating budget plan and providing saving tips to a more sophisticated investment climb up that fits each individual unique needs and background. For example, HelloWallet is currently able to pep up a customer to apply for a visa with $500 currency points per year because excessive spending on grocery and large pr operty deposit 10,000 in the checking account. With the new behavior investor model, it can recommend the akin individual to invest short term money markets products if his risk tolerance is low and require short term liquidity (with a list of the products from different dealer) or it can recommend user to buy righteousness income mutual fund if their risk tolerance is high and has no need for the cash for the near term.Another advantage and opportunity for the HelloWallet is that behavior finance is a relatively new concept and tralatitious financial adviser feel uncomfortable to ask customer these psychological questions face to face. It is often easier for the user to interact with a computer to fill out the questionnaire. This will help to collect more accurate information to build consentient virtual financial advisor- customer relations which besides benefit the HelloWallet business in the long term as clients are tend to stick to the uniform advisor(in our case a virt ual financial advisor HelloWallet) if she/he understands clients needs better.Question 2 How do the concepts of behavioral finance create challenges for HelloWallet?HelloWallets system creates customized budget plans for the users based on traditional finance and on trend analysis. This poses a challenge to HelloWallet because they do not merged the behavioral aspects of their clients. This will lead to creating recommendations that are not suitable to all their clients. Many models bugger off been developed over the years to incorporate behavioral finance traits in the clients portfolios. There are four different models that attempt to explain the behavior of individuals and their implications on portfolio construction The pulmonary tuberculosis and Savings Model, the Behavioral Asset Pricing Model, the Behavioral Portfolio Theory and eventually the Adaptive grocerys Hypothesis.Empirical studies show that some investors exhibit mental method of accounting where they separate their investments in different accounts in their heads and assign them to different expenses, forgetting to cipher at them as one portfolio. In this instance this will cause a part of HelloWallets target market to refrain from using their software due to this behavioral trait. Clients that have regret aversion and have been suffering from mental accounting will be too panic-struck to adopt HelloWallets service out of fear of realizing that they are in financial distress. Those clients do not have a serious want and readiness to engage in an assessment of their personalized financial wellness therefore it will limit HelloWallets penetration of this market. This intertwines with cognitive dissonance, where nation avoid facing financial reality. Statistics show that a vast majority of tidy sum suffers from that. People feel discomfort from receiving information that contradicts beliefs that are fasten in their personalities. Therefore, not wanting to face the idea that things m ay not be ok is a huge bulwark for the adoption of HelloWallet by customers.Naturally humans are prone to resistance to change. They are programmed to cohere in their comfort zone and stick to what they are familiar with. Having to render advice from a computer might not be something easily accepted. Moreover, regard to HelloWallet model, clients should incorporate all of their accounts including their assets and liabilities and update them if needed. This process could be a barrier for people suffering for status quo preconceived opinion. In fact, this bias is an emotional bias in which people tend to do nothing instead of do change. This will affect Hellowallet in two ways. Firstly it will maintain people from registering, as they will prefer sticking with their old traditional way of managing their finance. Secondly, it will reduce the efficiency of the company model, as people will update their data less frequently making unfaithful any outcome from model of HelloWallet.T he way HelloWallet collects clients information is via its software online. Users stimulation their answers to HelloWallets questionnaire after which they will be categorized and given a budget plan. However individual circumstances change over time, and sometimes change abruptly. As the client moves across his life stages his information should be updated and changed accordingly, but this is not the case. Therefore HelloWallet might suffer from information affect bias known as Anchoring & Adjustment Bias. This will lead to the clients results organism anchored to assumptions and information that does not hold true anymore.In fact, the Adaptive Market Hypothesis states that adapting is actually necessary for survival thus, changes need to be apply to the software occasionally to improve chances of meeting clients goals. Anchoring and adjustment bias will make it more difficult for clients to adapt. If the users have a bad experience due to this bias, HelloWallet will start losing business to its competitors. Similarly the lack of personal interaction with customers will result in uncomfortable clients that will not understand the effects of short-term deprivation in relation to the boilers suit long-term savings outcome.The lack of personal interaction will also destroy value. The company will not be able to build and maintain a consistent approach with its clients, if they are dealing with a computer. If there is no relationship building, the client will move to the competitor or just do his budget by himself after the archetypal negative experience. It might not be sustainable, and might prove heavily to retain customer value using this approach.In addition to that, query showed that people tend to behave impatiently today but plan to act patiently in the future. This is known as self-control bias. The all point of financial planning is to be able to help client to better allocate their financial resources to meet their short-term liabilities and goals while saving for future or long terms needs. The efficiency of HelloWallet advice on personal financial planning depends on how responsive client will be to their advice. In this case, this bias could be an issue, as clients will tend to film what they prefer (short term satisfaction) instead of what suit best to their financial point and neglect the long term.