Need to Know Your Clients Better? Try Playing a Game

UC Berkeley professor Shachar Kariv tells ThinkAdvisor how his software gamifies the task of understanding clients’ true risk tolerance

Standard risk tolerance questionnaires are useless, Kariv says. Standard risk tolerance questionnaires are useless, Kariv says.

How do you put more fun in your clients’ lives?

Try going beyond traditional interview questionnaires to electronically gamify the intake process — at the same time, learn precisely how each client makes investment decisions.

An economics professor at the University of California, Berkeley has invented video game-like software that, he says, does just that. Based on math, game theory and behavioral economics principles, it uses graphical shapes and decision-making choices to reveal a unique “economic fingerprint.”

In an interview with ThinkAdvisor, Shachar Kariv, chair of UC Berkeley’s economics department, explains why his algorithmic innovation outshines traditional questionnaires and surveys.

The game and decision theorist, 46, is also chief scientist of the Berkeley, California-based firm offering the new tool, TrueProfile Ltd., a company of Capital Preferences.

CEO Bernard Del Rey and Kariv co-founded Capital in 2014. Del Rey earlier held high-level posts at Morgan Stanley, JPMorgan Chase and Bank One, among other financial institutions.

The game allows individuals to make tradeoffs on risk versus return, today versus tomorrow and themselves versus others. In tandem, the software measures their preferences to help financial advisors build portfolios that best fit client needs.

Capital Preferences has attracted notable attention in the three years since it launched: UBS named it in 2015 one of the top 12 fintech innovators, according to Capital’s website. Further, Bloomberg View calls Kariv’s economics department No. 1 for having “the most influence on the profession in the past four decades.”

The TrueProfile game has been tested extensively on a global basis for more than a decade by a wide range of people, spanning those with little education to graduate students at Berkeley, Yale and Stanford.

The system’s individual modules encompass risk profiling, time preferences, legacy preferences and goal priorities. The first offerings — now available for licensing — assess risk tolerance, loss aversion and decision consistency, as well as provide turnkey custom portfolio assessment and building.

On Oct. 27, Kariv conducted an all-day course in New York City on the math theory behind TrueProfile. Comprising a panel discussing the ways advisors can use the tool were Riley Etheridge, former Merrill Lynch head of advisor development; Scott MacKillop, CEO of First Ascent Asset Management; and Jeff Miller, former UBS head of investment advisory and financial planning.

ThinkAdvisor recently interviewed Kariv, on the phone from Berkeley. A native of Israel, he has a master’s and Ph.D. in economics from New York University. His dissertation, for which he received NYU’s Outstanding Dissertation Award in the Social Sciences, showed that completely rational behavior can lead to herd behavior, which often leads to stock market booms — and busts. Indeed, the professor wrote that herds often adopt suboptimal actions. Now, with introduction of a system said to predict folks’ financial behavior, he is focusing on helping FAs help clients make the right investing decisions.

Here are highlights of our interview:

THINKADVISOR: What should financial advisors know about state-of-the-art behavioral economics?

SHACHAR KARIV: Behavioral economics is standing on the high shoulders of standard economics, which is about improving people’s well-being. We’re at the third, or maybe even fourth, level of behavioral economics. There’s very little economics in behavioral economics. But it’s like [application of] alternative medicine, which is always good with standard medicine — otherwise it becomes voodoo medicine.

Why is gamification helpful to advisors?

It puts the methodology right in front of the client. There are two ways for advisors to learn about clients. The usual way is when they ask in a questionnaire, “What are your goals?” and so on. We economists believe that this method of “stated preferences” is — well, to put it mildly and gently — useless because people can’t articulate their preferences. Actions speak louder than words: Don’t tell her you love her. That’s “cheap talk.”  Bring her flowers. We call client questionnaires and surveys “cheap talk.”

What’s the other way to learn about a client?

Our method, which [generates] “revealed preferences.” For instance, we never ask, “Tell me how risk-averse you are from 1 to 10.” That’s meaningless. We put you in a situation where you have to make decisions and take action that involves trading off risk vs. returns. We understand your risk attitude by the way you make each decision.

What do one’s revealed preferences add up to?

The client’s unique “economic fingerprint” because, again, it’s not what the person says; it’s what he does. When people play our game, they take action. I don’t mean to imply that we have an x-ray into people’s financial preferences, but I’ll claim that we can get pretty close.

What do folks use to interact with the game?

Their phone, tablet or computer. Because we [employ] graphical shapes, I like to think of the game as “Space Invaders of Financial Decision-Making.” Younger people may think of it as Tetris.

How long does it take to complete?

It depends on which [module]. To get a good understanding of a person’s economic fingerprint, we need them to make about six to eight decisions. During our research, thousands of people who have done this game took only between 12 and 18 seconds to make one decision.

Please elaborate on Capital Preferences CEO Bernard Del Rey’s statement that “deeper client understanding is the only sustainable advantage for today’s advice-givers.”

If my financial advisor doesn’t know my goals, preferences and constraints, he can never help me. Goals such as: I want to retire at a certain age with a certain income or I want to renovate my kitchen — otherwise my wife will leave me [laughs].  But I have constraints about how much money I’m making. I’m asking an advisor to help me solve this problem so I’ll be able to achieve my goals given my constraints.

Why does “having statistical confidence in … client diagnostics matter now more than ever,” as Mr. Del Rey stresses?

Because life is much more complicated, and we’re giving clients much more advanced and sophisticated financial products. Everything in life has probability. Would you drive on a bridge that was designed without mathematics? Accept nothing in life without statistical confidence interval [estimated range of values].

Attitudes about risk inform nearly all aspects of decision-making, you’ve said. That’s a big statement!

Maybe not big enough. Everything is uncertain in life. Nothing is for sure. Until you open a banana [and bite], you don’t know how it will taste.

Please talk more about the aspect of your game that focuses on risk preferences.

Existing methods measure risk aversion very imprecisely. Our game distinguishes among risk aversion, loss aversion and ambiguity aversion. People talk about loss aversion, but they don't know what it is; and no one is even aware of capturing ambiguity aversion, which is tremendously important.

Just what is ambiguity aversion?

The aversion to unknown probability. For instance, if you’re quite ill and the doctor tells you the probability that you’ll live is between 60% and 80%, he hasn’t given you a precise probability — and you won’t like that. In investing, stocks are not only risky compared to bonds, they’re also ambiguous because you can’t put precise probability on whether a stock is going to go up or down.

What’s the value of an advisor’s knowing about clients’ ambiguity aversion?

Research shows that people who shy away from stocks or freak out when the markets go down and sell at the wrong time are not risk-averse — they’re actually ambiguity-averse.

Most investors aren’t familiar with that term.

Right. And there’s no way to explain it in a survey or questionnaire. We all have it, but asking, “What’s your ambiguity?” is like asking how many white blood cells you think you have. [You’d respond] “How do I know?”

Why should an advisor care if a client is ambiguity-averse?

When markets become more volatile, ambiguity in the market increases. So it’s very important to identify clients who are ambiguity-averse. Our game not only identifies that, it will measure a person’s risk aversion, loss aversion and ambiguity aversion with precision.

By the way, is there another word for “gamification”— a name that’s vague, long and awkward?

I hate that word. It’s completely misused. Many times people put silly things inside a phone and call it gamification. We actually used mathematical theory from game theory and gamified it. I wish there were another word for this.

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