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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | Behavioral Biases in Private Banking Identification, Evaluation and Handling of Behavioral Biases based on the Trades of Customers of a Swiss Private Bank |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 39 |
| Date | 2021 |
| Zusammenfassung | It is widely documented and acknowledged that the assumptions of traditional finance theory do not adequately reflect reality. The concept that investors make rational and utility-maximizing decisions neglects the important fact that humans are under a myriad of emotional and cognitive influences, called behavioral biases, that shape our decisions and behavior. In financial markets, these influences can lead to very costly consequences that could be prevented by appropriate consideration of behavioral finance. This thesis focuses on the occurrence of behavioral biases in the private banking sector by analyzing transaction and portfolio data of an established Swiss private bank between 2019 and 2021. For this purpose, the private bank’s data is examined in eight different measures, whereby the measures serve as indicators for certain behavioral biases. In addition to an overall examination regarding the existence of biases, the primary focus is placed on the extent to which advisor involvement can reduce or perhaps even increase biased behavior. Secondly, the study also addresses the degree to which risk propensity affects the occurrence of behavioral biases. The trading-based measures such as turnover are calculated per individual transaction and then summed by portfolio, while portfolio-based measures such as diversification are computed directly by portfolio. Subsequently, the distribution of the values, in each case divided according to the type of mandate and risk profile, is evaluated and analyzed for statistically significant differences in the median. Moreover, the extent to which the measure influences portfolio returns is examined using linear regression models. Lastly, the correlation between the different measures is analyzed with a correlation matrix. The results suggest that the involvement of a professional advisor has a reducing effect on both overconfidence and underdiversification, while home bias is increased. Furthermore, higher risk propensity is found to lead to less overconfidence, less home bias, and generally more diversified portfolios among relative return profiles, while it is exactly the opposite for absolute return investors. Furthermore, by taking market returns or volatility into account, results show that external events are very much considered when making investment decisions. However, the extent remains predominantly independent of the type of mandate or risk propensity and occurs in approximately the same proportions. Furthermore, the evaluation of the individual measures confirms that biased decisions lead to visibly poorer returns in almost every case. Finally, it is also found that there are statistically significant correlations between various behavioral biases. In order to minimize the biases that have proven to be costly, the first and most important step is to be aware of their existence. For overconfident investors, it is recommended to get to know one’s own capabilities better, for example by recording the investment decisions made, especially unsuccessful ones. For underdiversified or home biased investors, it is advisable to assess the portfolio composition as a whole, rather than evaluating individual positions. This thesis differs from most of the previous quantitative research on this topic due to the fact that, unlike private or institutional investors, advisors’ investment decisions are influenced not only by biases but also by their professional incentives such as commissions. This extends and complicates the evaluation of behavioral patterns in the private banking sector but at the same time emphasizes the importance that not all market participants can be assessed in the same manner. |
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