In just 6 days, 5121 Italian banking clients digitally completed their risk profile using an alternative, engaging method based on decision science. We observed that loss aversion is largely independent of the risk-return preferences commonly used for investor classification and uncovered some other interesting insights.
Three main takeaways of the study (1)
- Risk and loss aversion are complementary:Loss aversion is an essential component of people’s investment decisions. Furthermore, the study indicates that these two preferences and individuals’ background characteristics align with those observed in the literature. In another recent study(2), loss aversion participants being more risk averse.98.2% of respondents recognized themselves in the result.
- Cross-cultural investment behavior:
The study highlights intriguing differences in investment behavior between Italians and the French (3). Despite the passionate stereotype often associated with Italians, the research reveals that Italians tend to be less emotionally driven in their investment decisions than the French, underlining the importance designing financial services.
- Consent beyond profiling:
The study underscores that investor profiling extends beyond merely capturing risk preferences. Obtaining client consent for data usage has become increasingly challenging for financial institutions. The study reveals a promising trend—73% of respondents were willing to share data with their financial institutions to be used, even outside the scope of investments.
LOSS AVERSION IN A NEW LIGHT
Loss aversion has been recognized to be an important driver of people’s investment decisions. Encouraged by regulators(4)(5), financial institutions seek new, engaging ways to incorporate clients’ attitude toward loss in their risk classifications. The most critical obstacle is the lack of a valid measurement method for loss aversion that can be straightforwardly incorporated into existing processes. The first series of studies in Ireland, Belgium, The Netherlands, and France confirmed that the respondents preferred an interactive, quantitative method to traditional, static risk questionnaires.
After our last study on how the French perceived risk, we took the test over the Alps to Italy; the new research unraveled some intriguing insights about how Italians approach risk.
A UNIQUE BLEND OF BEHAVIORS
Italians tend to be more cautious than the French when assessing the willingness to take risk. Italians settle for a lower sure gain that waives uncertainty compared to the French.
The caution of Italians or their willingness to take risk fluctuates more as market conditions change. And, complementary to the previous, Italians balance gains and losses more evenly than the French. Contrary to the often-used stereotype of passionate Italians, they show more composure and less emotionality than the French when balancing positive and negative change.
All this shows how complex human decisions come about. It also points at the relevance of a solid measurement of the drivers of those decisions, to serve investors in a personalized way.
ITALIANS EMBRACE QUANTITATIVE METHOD
An astonishing 98.2% of Italians surveyed resonated with the profile generated by the interactive, quantitative method. This overwhelming recognition underscores the precision and accuracy of our findings in capturing the nuances of Italian attitudes toward risk and loss. It’s a remarkable validation of the study’s methodology and a testament to Italians’ keen understanding of their own investor preferences. This high level of alignment with the study’s results further confirms the relevance and significance of our research in shedding light on the intricacies of decision-making.
UNLOCKING TRUST: THE ROAD TO CONSENT
Securing consent from clients to utilize their data has become an increasingly formidable challenge for financial institutions. In an era marked by growing concerns about privacy and data security, individuals have become more discerning and cautious about how their personal information is handled.
While eager to leverage data for enhancing services and risk assessment, financial institutions must navigate a complex landscape of regulations and heightened consumer awareness. Gaining consent now demands transparency, clear communication, and a robust framework for safeguarding sensitive information.
Striking this delicate balance between data-driven innovation and respecting individual privacy remains a daunting task that requires meticulous attention and a commitment to building and maintaining trust with clients in an evolving digital world. However, 73% of respondents were ready to share this data on what drives their financial well-being with their financial institutions.
This result suggests that, while obtaining consent remains challenging, there is a clear willingness among a significant majority of clients to engage in data-sharing relationships with financial organizations, provided they trust and recognize themselves in the results.
The finality of investor profiling extends far beyond just tailoring investment solutions to individual clients. For a bank, neglecting to acknowledge and respond to the unique risk perceptions of clients, such as those between the average French and Italian client, would indeed be unwise. This study is an invitation to review and differentiate the investment processes and solutions, not just at an individual level but also at the initial contact stage, even in a hybrid advisory setup.
The significance of risk profiling isn’t confined to investments. It has a much broader application spectrum. Think of it as a versatile tool that can inform the design of, e.g., insurance product, a commercial tool to engage and acquire new clients, guiding recruitment strategies toward those individuals whose profiles harmonize with the institution’s offering.
In conclusion, the study transcends borders and stereotypes, highlighting the interplay of emotions and rationality in investment, the evolving landscape of data consent, and the profound impact of context on financial behavior. These insights not only deepen our understanding but also present opportunities for more tailored and responsive financial services in an ever-evolving digital world. The various surveys confirm our ability to build tools that empower retail investors in finding good outcomes and making conscious investment decisions.
Other notable takeaways
CHAMPIONS OF RATIONALITY
The Italian hold on to their gains but gamble their way-out of losses, albeit much less than the other Europeans. 81% of the Italians (vs 75% of the French) don’t want to miss out on a sure gain. But at the same time, 51% (vs 56% of the French) will take their chances to avoid a sure loss. Similar behavior helps explain the propensity to save or invest in times of high inflation. The emotional response to losses is much stronger than the response to corresponding gains. The median Italian balances gains and losses 1 for 1, while for the median French losses impact 1.5 times more than gains.
When asking for input based on a range of possibilities with a preselected default option, about 29% of the Italian confirm the default setting. This is a textbook decision science finding. Digital processes tend to use default answers to improve completion rates: leading people towards clicking “accept” and moving to the next screen. It is therefore essential to present the information in the most personalized way possible, for example, by linking the range of possibilities to the client’s personal situation.
(2) Dennie van Dolder and Jurgen Vandenbroucke (2023), Behavioral risk profiling, available at www.ssrn.com
(3) Field Research: French Banking Clients Prefer Risk Profiles That Make Them Think
(4) ESMA (2017) consultation paper 35-43-748.
(5) European Commission (2022) Targeted consultation on options to enhance the suitability and appropriateness assessment.
Eager to learn more?
We digitally profiled 5121 Italian banking clients in less than 6 days without any human intervention. Another way to approach potential investors at a fraction of the cost! Curious about more insights? How you compare to other banks?