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Behavioral Finance Guru’s Diverse Thoughts

May 24, 2012

Widely acclaimed as the Master of Value Investing, Parag Parikh (Chairman, Parag Parikh Financial Advisory Services Limited) emerges from his mid-day meditation session, apologetic that he slightly overshot his appointment as he fell into a slumber. He truly personifies equanimity which he talks and walks.

Parag Parikh (www.ppfas.com) has been evangelizing the concept of behavioral finance, appealing investors to remain focused on long-term goals rather than fall prey to instant gratification – staying on the rational track rather than swaying towards the emotional, and surely keeping away from the herd mentality.

While behavioral finance is now a considerably developed science as far as investments are concerned, who but the high priest of rational behavior could be better equipped to unravel some of the diverse currents (and under-currents) that insurers ought to proactively understand and tap?

 

Q. In behavior finance do you see a distinct gender divide?

A. Behavior depends on various factors. It is a function of conditioning and circumstances. Given certain circumstances, each one behaves differently. Let us remember that males were predominantly hunters and women homemakers. A hunter has to take bold decisions and would be weak at his own peril. That does not mean either cannot be the other type.

Let us also remember the “Mind Vs Heart” and the “Left brain Vs Right brain” debate; your circumstances and conditioning would determine whether you are intuitive or calculative.

Interestingly, if you look at today’s trends, women have started dominating and also making investment decisions. Today’s girls are much smarter than boys. We are actually creating divisions.

 

Q. In terms of segment/s of our society, do you see any patterns in say how senior citizens exercise choice vis-à-vis those in their prime. Likewise, is there any regional bias in terms of risk taking or risk aversion?

A. You know aging when you age. With age you generally make wiser decisions. A young guy may no doubt be intelligent and brilliant but it is wisdom that comes with age and endures.

Unfortunately, today’s education is not about compassion and collaboration. It is rather about competition and we make our laws on the basis of that.

We make our yardsticks for measuring people on the basis of competition. We categorize and incentivize them with money. Money does not give happiness but rather greed and discontent. People do not realize there is something called contentment.

Again, there are some myths like Indians are not long-term investors. That is not true. The very fact that they invest in FDs, PPF, Endowment, Post Office and gold proves it otherwise. Why cannot we cater to that need? We should develop a pull market rather than a push one. We need advertisements that have a thought process that appeals to the rationality rather than the emotional stuff we see today. Behavior is long-term but what are you doing about it?

In South India, which has a very high degree of education, people who are hard working and have humility have a predominantly long-term philosophy and live by that. The North possesses more of a trader mentality. Take Muscat and Dubai, for instance. Both are in the Gulf region, yet Indians in Dubai are driven by instant gratification. Generally, the working class is long-term and businessmen are short-term.

 

Q. Are there any segments which in your experience demonstrate strong EQ despite a not-so-great IQ or whose EQ and IQ are reasonably at par, or for that matter show high divergence?

A. It is all about how one individual uses self-control – his or her ability to delay instant gratification and wanting more for less.

 

Q. Have you noticed any shifting patterns among the youngest of the investing lot?

A. Today’s young have so many aspirations. They know what is possible. Given the societal change, everything is moving from self-sufficiency to higher self-sufficiency and higher indebtedness in the name of consumerism.

When you are down and out, you are always in a rat race and your nature starts changing. Increasing aspirations of spouse and material pressure further make you lose sight of the value system.

 

Q. Like the HNIs, are the NRIs one homogeneous lot in terms of investing behavior? Are their motivations and aspirations any different from the rest of the lot? Any noticeable distinction in their preference for an asset class?

A. HNIs are a different lot. If these are lawyers who litigate, they will be very competitive. Likewise, among doctors there may be ethical or non-ethical strains. The patterns are generally individualistic.

 

Q. How does an inside view influence any particular individual’s rationality in a particular group?

A. This is all about lack of self-control and willpower. Most of individuals going for instant gratification would be the ones say going for fast food or a smoke despite realizing that it is not good for their health.

 

Q. Does the investing behavior transcend into how each distinct lot banks or fulfils (or does not fulfil) respective insurance needs?

A. It is all about needs and aspirations. A 70 year old would want to play very safe but a younger person would like to take chances.

 

Q. Do you notice any discerning shift when it is a group buying versus an individual one?

A. We always have safety in numbers. If it is a collective action that turns out to be wrong, all are wrong or a general belief that something good will come out of it. It is just about not taking responsibility.

 

Q. Any thoughts on how a particular segment which does learn from past irrationality and other which never does?

A. We have a big market and each year a fresh lot comes in. The new crop ends up making same mistakes of the earlier lot, as they are inexperienced.

 

Q. Does irrational exuberance have anything to do with all of this?

A. As a bubble starts to build up, everyone joins in and loses their rationality. The overarching belief then, is that things are going to be permanent.

 

Q. Do you believe there is a consistency in this ‘emotionality’ of decision-making across all financial services?

A. Wherever there is money, greed and fear dominate. You need to have the courage to be contrarian if you do not want to lose.

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