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Horizons: Family Office & Investor Magazine

Dr. Thomas Oberlechner: The Era of Behavioral Financial Technology Is Here

Monday, September 19, 2022

Finance is, in the end, about people: The minds and hands that manage or account for assets and make investment decisions are human. That’s the premise of BehaviorQuant founders Dr. Gerlinde Berghofer and Dr. Thomas Oberlechner, who started their university education in the cradle of psychology, Vienna. In the following 25 years, these two PhDs laid the foundation of an unique and industry- leading technology based on research at Harvard, MIT and Columbia University, and their studies with hundreds of decision makers at the world’s leading financial institutions, from JPMorgan Chase to Merrill Lynch to Goldman Sachs.

BehaviorQuant integrates systematic knowledge obtained from several thousands of financial decision makers – from executives at the world’s largest banks, top Wall Street traders, asset managers, fund managers, institutional investors, to advisors and their customers. BehaviorQuant’s solutions integrate the highest levels of expertise in science, behavioral finance, personality and decision research, team dynamics, education, and coaching.

This means that for the first time ever, allocators are able to objectively evaluate the people and teams behind financial decisions and transactions. BehaviorQuant gives decision makers predictive knowledge of the asset managers, investors, clients, and customers you work with – and even about yourself and your own teams, all based on hard, objective data.

The same technology also allows investment professionals themselves to focus, analyze and eventually master the most complex aspect of their own decisions: Human behavior. BehaviorQuant’s Performance Coach allows you to compare yourself to hundreds of other investment professionals and receive tailored recommendations to optimize your processes and outcomes.

Horizons readers can email request@ behaviorquant.com to schedule a free demo.

Dr. Oberlechner is an internationally recognized expert in decision psychology and behavioral science. He completed his studies in Europe and the US and holds a psychology doctorate and three Masters’ degrees in law, psychology, and consulting psychology from Harvard University and University of Vienna.

Dr. Oberlechner has researched and taught at Harvard, MIT, University of Cologne, and the University of Vienna. His research has widely been published in academic and professional journals and in his books The Psychology of the Foreign Exchange Market (Wiley Publishers) and The Psychology of Ethics in the Finance and Investment Industry (CFA Institute).

Prior to founding BehaviorQuant, Dr. Oberlechner spent 6 years in Silicon Valley creating behavioral solutions for financial decision makers as Chief Science Officer of a FinTech company and as a consultant for his own company, FinPsy LLC (www.finpsy.com).

Matthias Knab: In one sentence, what does BehaviorQuant do for family offices?

Dr. Thomas Oberlechner: BehaviorQuant helps family offices master the most complex aspect of investing: Human behavior. It is an easy to use turnkey technology for making better decisions about families, professionals and investments. With BehaviorQuant, family offices make far more informed and successful investment decisions and have far more effective relationships to the families they serve.

Matthias Knab: Could you please tell me about your background in Europe and the United States?

Dr. Thomas Oberlechner: Personally, I have always been fascinated by the differences between people and the way they make decisions. I was trained as a clinical psychologist and psychotherapist in Vienna. As a university professor, my research has focused on how we make financial decisions. And the fact that we are all different financial decision makers.

My female cofounder, Dr. Gerlinde Berghofer, and I are PhDs with a strong background in behavioral science. We spent years doing research at Harvard, MIT and Columbia University. From academia, we then moved to Silicon Valley to develop behavioral technology for investment professionals.

Matthias Knab: How do your experiences on the West Coast differ from those on the East Coast, and how did you start BehaviorQuant?

Dr. Thomas Oberlechner: On the East Coast, new conversations always started with the question “Where do you do research? At what university?” In Silicon Valley, the question was, “What ideas are you turning into products? At what startup?”

San Francisco offered us a fascinating opportunity to turn science into technology solutions. Solutions that provide investment professionals with immediate real-world support. Bridging these worlds continues to fascinate me. In 2018, we established BehaviorQuant in Austria. We received a generous government grant to realize our vision: To radically improve real-life financial decisions and combine decision science with machine learning for solutions that directly support practitioners.

Matthias Knab: How specifically did your research at Harvard and MIT pave the way for BehaviorQuant?

Dr. Thomas Oberlechner: As a professor, I have been fortunate to partner with dozens of the world’s financial institutions for my research, from Goldman Sachs to Merrill Lynch to UBS. I have worked with investment decision makers ranging from top traders and asset managers to family offices, investors and financial clients.

One thing I have noticed over and over again - a fundamental problem in the investment world: There is no systematic knowledge about the decision makers behind investment decisions and visible returns. And there is no systematic knowledge about how various professionals differ in how they actually make financial decisions. But knowing how a professional, how a team translates market information into decisions – well, that is critical.

As financial decision makers, we all have different styles, personalities, values, goals, and ways of making decisions. Before BehaviorQuant we had no systematic knowledge of these important aspects that determine how successfully you navigate your course through the rough waters of financial risks and returns. Markets are made of people.

Matthias Knab: Why do you think behavior and psychology are so particularly important for family offices?

Dr. Thomas Oberlechner: Lack of knowledge about the actual decision-makers is ubiquitous, but it particularly affects family offices. For example, when you hire a professional, you ask yourself: will this person really fit in and be compatible with us? In your relationship with family members, you will encounter very different personal styles. And how well you generate performance while minimizing investment risk as a CIO or investment team depends on your behavioral style. Psychological and behavioral issues are decisive for each and every aspect of family office operations. They form the basis for the decisions they make every day.

Matthias Knab: There must be high costs and negative consequences of a lack of systematic knowledge about decision makers. What are they?

Dr. Thomas Oberlechner: The list is longer than the interview allows! But let me name a few. For example, we know that wrong selection decisions for internal positions cost financial institutions three times the annual salary of the position. Three times that! Individual miscasts can actually be much more expensive, depending on the circumstances.

We also know that dissatisfaction of financial clients and client attrition is a big topic nobody wants to talk about. Financial institutions lose 4-7% of their clients every year. The main reason for this? Lack of knowledge about client values and goals. Moreover, that lack of knowledge about professionals’ behavioral characteristics also leads to underperformance and missed profit opportunities.

In my own research with many of the top Wall Street institutions, we found that over 30% of investment performance depends on the behavioral dispositions of decision makers. Take, for example, the unrecognized risks in manager selection. Research has shown that fund managers with high scores in the “dark triad” underperform others by 33%.

Matthias Knab: Dark Triad, that sounds mysterious. Please explain what it means.

Dr. Thomas Oberlechner: The dark triad is a clinical term for three highly destructive traits that can also be found in some financial professionals. Professionals who lack empathy and who are unable to see the world from somebody else’s perspective, what somebody else is thinking and feeling. Professionals who have no conscience and feel no remorse. And finally, narcissistic financial professionals with a highly inflated ego that is highly destructive for the people surrounding them and the institution they work for.

Matthias Knab: These are impressive numbers and examples that show how much is at stake. Aren’t decisions made about people, and by people, in family offices all the time?

Dr. Thomas Oberlechner: Exactly. People are always at the center of the decisions of family offices. For example, in the selection of professionals, in the interactions with the family, and in how investment decisions are made. Often, they make these decisions intuitively. And it is fantastic that often we can rely on our intuition. But there is also much evidence that shows that how biased we are when we make intuitive decisions, when we evaluate people, when we interact with others. Regardless of how experienced you are as a financial professional, you will always benefit from a system that gives you additional systematic, objective knowledge about people. Enhance your own intuition with this knowledge and you will make far better decisions -- whether you want to interact more effectively with family members, optimize your team’s decision- making, hire promising professionals, or select compatible external fund managers. BehaviorQuant effortlessly makes you a master of these tasks.

Matthias Knab: Please tell me more about the different solutions offered by BehaviorQuant. How does BQ Advisory work?

Dr. Thomas Oberlechner: BQ Advisory helps family offices build highly efficient and sustainable relationships with each member of the families they serve. It shows the office how to best support their family clients given their unique financial personalities, and it lets them anticipate their reactions to market events. It provides the office with relevant insights into the key behavioral aspects of the entire family system – you can compare and contrast family members, and you can group family members by their important behavioral aspects. For example, BQ Advisory shows you at the click of your mouse which family members share the same core values. Who seeks stimulation and challenge in their financial lives, and which family members prefer their established, more traditional lifestyle?

Matthias Knab: Why do family offices need BQ Advisory?

Dr. Thomas Oberlechner: We find that family offices, even when they have worked with a family for many years, often know very little about the different values, preferences, and expectations of the various family members. They do not know the unique style of each individual, at least not in a systematic and objective way. What are their behavioral tendencies, and what are their main expectations of them as financial advisors? How will they react individually to sudden market volatility triggered, for example, by the war in Ukraine these days? Not knowing family members’ behavioral preferences and styles will decrease the family’s satisfaction with the office and may lead the family to look elsewhere for better services. Poor communication with family members regularly stems from a failure to accommodate their individual styles. This is where BQ Advisory comes in.

Matthias Knab: What exactly does the family office gain from using BQ Advisory?

Dr. Thomas Oberlechner: BQ Advisory helps family offices build more satisfying and efficient relationships with family members. How? By providing the family office with systematic information about what makes each family member tick. Their personal goals, values, preferences, risk appetites, and their expectations for support from the office. In addition, predictions about likely future behavior. For example, what is the risk that they will switch services? Who needs immediate support when markets become volatile? Last but not least, BQ Advisory gives the family office tailored recommendations for efficient communication with each family member. This creates successful relationships, increases satisfaction, and prevents unexpected changes in the relationship with the family loss.

Matthias Knab: What does BQ Performance Coach do?

Dr. Thomas Oberlechner: BQ Performance helps CIOs and entire investment teams optimize their own decision-making processes. It provides comprehensive analysis of professionals’ decision making, and delivers results that lead to better investment decisions and measurably higher performance. As a family office, you clearly see the dispositions and decision tendencies of your investment team. BQ Performance reveals the aspects of your team’s interaction and decision- making that drive investment performance and identifies the characteristics that reduce investment performance or threaten returns. It also provides strategic recommendations against harmful behavioral patterns so you can improve your decision-making processes. The technical term for this is debiasing – providing targeted information to avoid distortions in your decision-making process. This leads to significant improvements in your results and investment performance.

Matthias Knab: And finally, what about BQ Performance Select?

Dr. Thomas Oberlechner: As the name suggests, family offices make far more informed selection decisions with BQ Performance Select. For example, when the office hires a new team member or when it evaluates new external fund managers. With BQ Performance select, the office can easily identify those professionals who are truly compatible with its culture, its existing team and its goals.

You can also easily identify those fund managers who have the greatest potential to outperform in the future. Before BQ Performance Select, family offices largely relied on peer recommendations, past performance data, and past track records to select fund managers. However, we all know the limited predictive value of extrapolating past results. If, on the other hand, one has information about the behavioral tendencies of managers and of teams, then one has information that is highly predictive of future performance. How the manager, how the team translates information into investment decisions – that has great predictive value for future returns. Example: we know that investment teams lacking diversity in terms of how their members make decisions perform significantly worse than teams whose members have diverse decision- making styles.

With BQ Performance Select, family offices can easily and systematically compare individuals and teams and receive clear selection recommendations. And they can identify warning signals and invisible risks early, before they materialize. Often these are risks that would otherwise go undetected, as in the example of a family office that hired the Wall Street expert with the highest technical expertise. Only much later did it turn out that the expert they hired was not acting in the family office’s interest, but in his own.

Matthias Knab: So how does a family office actually use BehaviorQuant? Is it very complicated to learn?

Dr. Thomas Oberlechner: BehaviorQuant’s solutions are turnkey and very easy for practitioners to use. Our customers can invite any person, any team they want to analyze, even themselves, with emails that the system sends automatically. All the invited person has to do is click on a link in their invitation email. Then the system takes them by the hand and guides them through a series of fully automated questions, game-like tasks and decisions. Immediately upon completion, our customers see all results and recommendations in their online results dashboard.

To help them use the full power and functionality of BehaviorQuant, we provide initial in-person training. In addition, online manuals guide our users through each step of the system. But we usually hear how self-explanatory the system is, so many users don’t even open the manual.

Matthias Knab: What evidence do you have for the efficiency of BehaviorQuant’s results?

Dr. Thomas Oberlechner: Of course, all of BehaviorQuant’s solutions are scientifically sound and we have empirically tested their results. For example, in one study we tested the predictive power of BQ Performance with several hundreds of asset managers and other portfolio decision makers. While their average annual performance was about 10%, those the system identified as outperformers achieved an annual performance of 30%. To give another example, a study of over 600 wealth advisory clients demonstrated BQ Advisory’s superior quality. The system identified clients at risk of churn with 90% accuracy. Compare this to the 50% accuracy without BehaviorQuant!

Matthias Knab: What do your customers say about their experience with BehaviorQuant?

Dr. Thomas Oberlechner: We are indeed receiving enthusiastic feedback from users on both side of the Atlantic. They tell us that BehaviorQuant should be a mandatory tool in any decision-making process. They stress how BehaviorQuant’s solutions help them to make better decisions in a systematic and sustainable way. And they love how it helps them deepen their client relationships.

Just recently, we received a message from a US family office that uses BehaviorQuant as a risk management tool embedded within their asset management. They write that they captured another 40bps of pure alpha over a full market cycle by using it.

Matthias Knab: How does a family office get started with BehaviorQuant?

Dr. Thomas Oberlechner: Just email request@behaviorquant.com and we’ll schedule a demo with you.

Protected by the highest security standards, all solutions are available in the cloud, so you can use them anytime, anywhere. BehaviorQuant does not require installation. As it’s web based, BehaviorQuant works immediately on any computer, laptop, even your mobile phone.

 
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