What is Behavioral Fintech?
A New Approach to Financial Technology That Makes Everyone Better Off
Have you ever made a financial decision that didn't go well in hindsight—like mistaking news for investment advice and acting on it, trading too often, or avoiding investing completely?
Don’t worry, you're not alone.
We’ve all made choices based on emotions, habits, nudges, and/or impulse that ended up becoming costly mistakes.
Today, new technology is improving the way we make investing decisions by helping investors avoid both obvious and difficult-to-detect mistakes and identifying opportunities. Behavioral financial technology (behavioral fintech) is the culmination of the best behavioral economics research coupled with the benefits of digital technology, directed at practical financial problems we all face. This problem-solving technology is bringing about a new type of investor experience that can lead to better results.
What is behavioral fintech, how does it work, how can it make a meaningful difference in your life, and why is it becoming a meaningful investment game-changer?
What do you mean by “behavioral”?
The term “behavioral” comes from a major shift that occurred in economics in the 1980s and 90s that evolved the field from a “neoclassical” and heavily theory-based area of study to one with more practical applications. This new approach moved away from studying what perfectly rational “agents” would and should do, and towards looking at how normal, flawed, and busy people actually behave in real situations under real constraints with real consequences.
This new subfield of “behavioral economics” shifted research towards evidence-based topics and extended the types of questions taken on by academics to consider practical problems people face, such as why some people unnecessarily pay astronomically high interest rates or why crime rates drop in some cities and not others. One of the major advances in the field is known as Prospect Theory, an elegant mathematical model that explains why people avoid taking risks in some situations and conversely take large risks in others.
In step with economics, behavioral finance, a subfield of economics (called “financial economics”) also grew and expanded in scope and started addressing practical problems, such as why retail investors lose money when investing on their own, why people avoid the stock market, and whether markets are perfectly efficient.
The beauty of these findings is that they emerge across areas of life, not just in money matters. After all, our brain uses its same features for a variety of tasks. So it shouldn’t be a huge surprise that patterns observed in interpersonal relationships also show up in our investing behavior.
Behavioral economics is more useful than “traditional” theory because scientists can identify what factors weigh into our decisions, better positioning us to solve our biggest problems. One of the practical insights of behavioral economics is that by planning for irrationalities and systematic errors in decision-making (instead of hoping they simply go away) we can make better decisions in the heat of the moment.
All together now: Behavioral Fintech
Academic research has shown us the problems people face as financial decision-makers include missing out on reliable investment opportunities, delegating responsibility to the wrong advisors, and taking unnecessary risks.
Behavioral fintech actively solves these problems.
Technology and society changed rapidly and continue to do so, but our brains are essentially the same as when humans lived in tribal settings with unpredictable and dangerous environments. This is problematic today because our innate ways of dealing with risk, uncertainty, and complexity are managed largely by cognitive shortcuts (known as “heuristics”) that worked in the wild to keep us alive but lead to meaningful mistakes today.
The biases that drive our biggest financial mistakes are often exploited by companies, generally leading to many consumers being worse off. This is due in part to how our brains process information and operate when we make economic decisions. It is also the side effect of technological innovations, which are sharp double-edged swords with convenience on one side, and the potential for exploitation on the other.
The credit card, invented in 1946 when John C. Biggins introduced the "Charg-It," then popularized by Diners’ Club in 1950, is the perfect example: the technology that allows us to consume now and pay later perfectly exploits humans’ preferences for immediate gratification and delayed displeasure (known as “beta delta preferences”). Fast forward to Q4 of 2024 and consumer debt is now $17.3 trillion in the US alone, and climbing. This pattern is also observed in online trading.
In order to help actual people better navigate our complex financial decisions, a new form of technology called behavioral fintech is emerging. This is new technology that facilitates financial decisions—often driven by emotions, habits, or biases—with a consumer-centric approach to help people get better outcomes.
In order for financial technology to be considered behavioral fintech, we propose the following criteria:
Customer-Centricity
The first pillar of behavioral fintech is that it prioritizes the customer’s objectives. This means that the net benefit is designed to be gained by the person using it, even if at the cost of firm short-term objectives.
Today’s online investing platforms allow people to make quick investment decisions at “no cost” and reinforce the decision to trade by displaying digital confetti to celebrate this user behavior. The human brain is not optimized to make correct rapid financial decisions, and evidence suggests that people need extensive training to generate investing profits consistently.
For investment technology to be considered behavioral fintech it must first suit customers’ stated needs. If the customer’s primary objective is wealth creation, then gamified trading platforms are demonstrably not the proper way to accomplish this objective.
Hyper Customization
One of the primary contributions of behavioral fintech is the ability to leverage data to customize the experience and generate a correct diagnosis. This means that each person is unique and needs to be understood in their own context.
This powerful opportunity is enabled by behavioral economics research that now functions as live algorithms that work for the investor. For example, behavioral algorithms can understand trading behavior and communicate insights to the investor in an understandable way.
Transparency
Without the “full picture” we often arrive at the wrong conclusions. This is why data and analytics transparency are critical from a customer perspective so that people make informed choices.
While it is sometimes true that too much information leads to poor decisions, it is still a feature of behavioral fintech to provide information in such a way that optimal decisions can be made in complex scenarios.
Evidence-Based Approach
To bring it all together, the critical factor is that outcomes are clearly identified and measured along with other relevant data so that there is strong evidence that the technology has the intended, positive impact.
Debiasing and behavioral interventions do not always work out as planned, but that doesn’t mean that they should be abandoned completely. By understanding what insights drive optimal behavior and what might exacerbate mistakes, behavioral fintech can evolve as a living laboratory and continually iterate to generate better, evidence-based outcomes.
Charting a New Course for Fintech
Innovation in other areas of science and technology has enabled the invention and deployment of intelligent tools and gadgets that can help people in powerful ways. Behavioral fintech’s goal is to help investors overcome the odds that are stacked against them by serving their wealth accumulation needs.
By using various powerful technologies like artificial intelligence (AI), Decision Support Systems (DSS), and leveraging actionable research in mathematics, economics, psychology, and neuroscience, behavioral fintech helps people recognize patterns in their behavior and supports them in making better financial choices.
Equally important is defining that behavioral fintech does not exploit biases, weaknesses, and/or limited attention.
As we embark upon the next generation of financial technology, it’s important that we move past “faster and cheaper” as the goal and reorient our focus on creating better outcomes for all.
