Question 1

As outlined by Richard Thaler & Cass Sunstein, nudge theory is a concept in behavioral economics that suggests that small interventions, or nudges, can influence people’s behavior and decision-making without restricting their freedom of choice.

• Using any two applications, critically evaluate the arguments for and against the effectiveness of nudges in financial markets or in behavioral economics.
• Banking, pensions, and investor apps as well as fintech such as Revolut have employed data analytics and nudges to increase user engagement and help users make more effective financial decisions.

Question 2

You have just been employed by an Irish wealth management firm in their private client’s division. You are familiar with Michael Pompian’s book ‘Behavioural Finance and Your Portfolio’ which has described the 4 BITs – Preservers, Followers, Independents, and Accumulators. You mention to your supervisor that understanding an investor’s behavioral biases can help financial advisors and planners tailor their advice to meet the client’s needs and help them make better investment decisions.

(i) Explain the concept of Behavioural Investor Type (BIT) and the steps involved to determine a client’s BIT.
(ii) You are then asked to prepare a briefing note on two BITs – Preservers and Accumulators. As outlined by Pompian, you should discuss the following issues:

• What personal biases are likely driving each investor’s behavior and decision-making?
• How might the investor’s personal biases affect the investment strategy and solution decision?
• How should the firm moderate or adapt to the impact of these biases?
• What is the best investment strategy and solution for each investor?