Investment and Risk Tolerance Essay

Question 1 How do the c formerlypts of appearanceal finance create opportunities for HelloW allet?The on-line(prenominal) fiscal advising sites such as HelloWallet as well as its competitors, such as Mint.com and Yodlee, put forward compute and realistic fiscal advising operate establish purely on user commit transactions and disbursement category. The HelloWallet formation allows the user to create and chase aft(prenominal)wards customized budget plan. What is often important is that the establishment nookie automatically go forth m whizztary advice and deliver tips by victimization learning mining techniques.However, HelloWallet and its competitors do not provide either monetary analysis and rating based on user bearing and their psychographic characteristics, such as user person-to-personity, cheers, attitudes, interests and endangerment gross profit in terms of allow foringness. These psychographic classifications argon extremely relevant with rega rds to soul dodge and bump tolerance. Even with the similar bank transactions data and disbursement category, an investor background, past(a) experience, individualizedity and attitudes whoremonger make investing process unique for severally someone. With the military service of behavior finance theory, HelloWallet can pull in organisation to fit psychographic profiles to specific behavioural investor profile. As a result, a let on earning of user behavioral tendencies of spend and investment go away benefactor to provide better fiscal advice.An free and prompt way is to physique online questionnaire to fit apiece individual into divers(prenominal) behavioral investor fictitious characters. thither argon several models we can use, Barnewall bipartite model, Bailard, Biehl, and Kariser Five model and Pompian model. We use Pompian models as an example. The major reason for promoting Pompian is be motion it is less(prenominal) time-consuming and less complex. Therefore, it go forth be uncomplicated to be implemented on an online establishment and command less time worn-out(a) on convergeing out the adopt (as we pointed out in challenge, it is not an easy t ingest to ask online user to fill out survey with a divvy up of details).Pompian model identifies four behavioral investor types based on risk tolerance and dynamic/ hands-off scale passive flotation device, favourable follower, independent individualist and active accumulator. It is a top strike down turn up which is much efficient and simple by categorizing users into passive and active, then further break down into four types based on their risk tolerance. With these education, the user of HelloWallet lead be categorised based on their investment/ expending behavior type. Based on these antithetic types, the governance can easily provide much tailored investment tips and products to users. For example, once a user behavior type is place, the system can provide s aving 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 fiscal products (excluding senior high school risk ones), e.g., 2-year GICs. In addition, the system can try to persuade the soundness of these financial by focusing on elaborate the goal of these investment (what the terminate value go away be and what type of investors these investments for). If investor trammel a long term income need, 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 take and risk).With the make of the behavior investor/user types into the systems, HelloWallet can impart their financial advising service from purely creating budget plan and providing saving tips to a more sophisticated investment approach that fits each individual unique needs and background. For example, HelloWallet is currently able to recommend a node to apply for a visa with $ d strong bullion points per year because excessive spending on grocery and large cash deposit 10,000 in the checking account. With the new behavior investor model, it can recommend the resembling individual to invest short term g out of date 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 law 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 handed-down financial advisor feel uncomfortable to ask customer these psychological questions face to face. It is much easier for the user to interact with a figurer to fill out the questionnaire. This will help to collect more accurate information to bui ld solid virtual financial advisor-guest relations which also benefit the HelloWallet agate line in the long term as clients be tend to have to the same advisor(in our case a virtual 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 corporate the behavioral aspects of their clients. This will principal to creating recommendations that are not sheathable to all their clients. some(prenominal) models take been developed over the eld to incorporate behavioral finance traits in the clients portfolios. There are four different models that attempt to beg off the behavior of individuals and their implications on portfolio construction The enjoyment and Savings Model, the Behavioral Asset price Mo del, the Behavioral Portfolio Theory and finally the accommodative merchandises Hypothesis.Empirical studies show that some investors edge cordial accounting where they separate their investments in different accounts in their heads and assign them to different expenses, forgetting to look at them as one portfolio. In this instance this will cause a part of HelloWallets bulls eye market to refrain from using their bundle due to this behavioral trait. Clients that have sorrow aversion and have been keeping from mental accounting will be to a fault scared to adopt HelloWallets service out of fear of realizing that they are in financial distress. Those clients do not have a serious desire and cockiness to engage in an assessment of their personal financial health in that respectfore it will limit HelloWallets penetration of this market. This intertwines with cognitive dissonance, where mint avoid facing financial reality. Statistics show that a vast absolute majority of p eople suffers from that. People feel rawness from receiving information that contradicts beliefs that are entrenched in their personalities. Therefore, not wanting to face the psyche that things may not be ok is a huge barrier for the sufferance of HelloWallet by customers.Naturally humans are prone to resistance to change. They are programmed to gentle in their comfort zone and stick to what they are familiar with. Having to take 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 stipulation quo persuade. In fact, this bias is an emotional bias in which people tend to do nothing instead of making change. This will affect Hellowallet in two ways. for the first time it will prevent people from registering, as they will prefer sticking with their old tradition al way of managing their finance. Secondly, it will lop the ability of the company model, as people will update their data less frequently making inaccurate any outcome from model of HelloWallet.The way HelloWallet collects clients information is via its packet online. Users input their answers to HelloWallets questionnaire after which they will be categorized and presumptuousness a budget plan. However individual circumstances change over time, and sometimes change abruptly. As the client moves crosswise his life stages his information should be updated and changed accordingly, tho this is not the case. Therefore HelloWallet might suffer from information processing bias cognise as Anchoring & Ad neverthelessment Bias. This will lead to the clients results being anchored to assumptions and information that does not nurse true anymore.In fact, the Adaptive Market Hypothesis states that adapting is actually necessary for endurance thus, changes need to be applied to the softwa re occasionally to improve chances of act asing clients goals. Anchoring and adaptation bias will make it more difficult for clients to adapt. If the users have a cock-a-hoop experience due to this bias, HelloWallet will head 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 overall long-term nest egg 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 first negative experience. It might not be sustainable, and might prove hard to retain customer value using this approach.In addition to that, research showed that people tend to behave impatiently at once but plan to act patiently in the proximo. This is known as pigheadedness bias. The all point of financial cookery 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 provision depends on how responsive client will be to their advice. In this case, this bias could be an issue, as clients will tend to withdraw what they prefer (short term satisfaction) instead of what suit best to their financial situation and give way the long term.