Importance of Thinking and Speaking Human - IEDP
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Importance of Thinking and Speaking Human

Why financial professionals need to be familiar with psychology


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In a recent interview in Money magazine, Richard Thaler, a professor at the University of Chicago’s Booth School of Business, explains why financial professionals need to be familiar with psychology. The same could apply across the piece.

In his new book Misbehaving, which offers insights on the rise of behavioural economics, Thayer calls for “a new enriched approach to doing economic research one that acknowledges the existence and relevance of humans.” and one that accepts “the myriad ways people depart from the fictional creatures that populate economic models.”

A key message from behavioural economics is that we should look beyond what Thomas Schelling called “statistical life” to take account of “identified life” – the individual real person. Thaler emphasises this point when speaking to Money magazine’s financial advisers:

So if our client meetings aren’t spent pouring over data, where should our focus be? According to Thaler, it begins with “simply recognizing that the job of understanding what your clients’ goals and fears and needs are is at least as important as crunching the numbers… “If you understand how people think, then it’ll be easier for you to communicate with people and devise strategies that they will be able to implement.”

The failure of economists to take account of real people was evident before the 2008 financial crash which virtually no economist saw coming. Economic models too often make bad predictions, sometimes with serious consequences, because they are based on a misconception of human behaviour – one that assumes we are all rational and selfish. The core premise of economic theory is that people choose the best options open to them. This optimization theory is flawed because in reality the choices we have are very often too complex for us to assess or our clear understanding of our options is biased by poor information, wishful thinking, other losses of good judgment and by being human.

Many of these biases which affect human behaviour in general, allied to the complexity of modern business, can lead to deviations from what is normally expected in business and economic decision making. So understanding how and why humans think the way they do is critical. In summing up his advice to financial advisers Thaler says: “You can’t do your job well unless you understand how your clients think.” This would seem to be sage advice for all professionals and the key reason why being familiar with psychology is a prerequisite for any good manager or business leader.

Misbehaving: The Making of Behavioral Economics, Richard H. Thaler, W.W. Norton & Co., ISBN 978-0-393-08094-0

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