Need to Know Your Clients Better? Try Playing a Game

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?