Have you heard of “cognitive biases”? These famous human flaws that impair decision-making and make us make mistakes. Behavioral economics is one of tomorrow’s pillars for anticipating, anticipating, and correcting concerns about biased actions. The control of markets and different players must be reassessed. Through innovative financial services, especially thanks to artificial intelligence, fintech is constantly reinventing itself. What are the levers for growth and security? How to face the absence of rationality? Let’s talk about human frailties, behavioral economics, and the benefits of artificial intelligence.
Man is a complex animal: how to understand him?
Human and primary reactions
We won’t mention Nietzsche, but his theory of irrational man comes close… Like every being on earth, we react to our environment. Our feelings too. Therefore, a person listens to his instinct, but also to his emotions. During a stressful situation where the stakes are high, our ability to make decisions can be compromised. Once an individual is in the risk zone, their decision-making is impaired. In the field of behavioral finance, sociologists have clearly revealed this, and the 2017 Nobel Prize in Economics cites it as follows:
“Human beings make fundamentally irrational choices in economic environments,” Richard Thaler.
Definition of our (non)reason
The famous “cognitive biases” introduce people’s rational decisions. We are always looking for meaning to know why and how, and yet the truth of the facts is not the first thing our brain interprets. This misleading thought pattern is falsely logical. According to experts, six different cognitive biases have been identified:
- Attention bias: depending on our fears and appetite for certain objects, our brain makes a choice. He chooses. Ease of action, distracting stimuli, and avoidance strategies are some of the psychological weapons we use.
- Illusory bias: as the name suggests, our brain is biased by a sensorimotor disorder and the information that reaches us is then poorly analyzed.
- Memory distortion: on an emotional level, our thinking is then distorted by memory and thus our memories. On the border between reality and the unconscious.
- Rationale bias: in other words, being wrong. It is a fallacy to think between elements that confirm and refute facts.
- Personality bias: we’re talking about personality here. Some individuals are more inclined towards positivity or, on the contrary, towards vigilance (apart from socio-cultural aspects).
- Judgmental biases: interpretations of facts differ between probabilities, impressions, preconceptions, and hypotheses.
What is Behavioral Economics?
It’s definitely a question of psychology. Behavioral economics ventures into the terrain of feelings, sensations and emotions. So, if we can sum it up, it focuses on human reactions and lack of clarity. This type of economics makes it possible to observe and understand the irrational behavior of an individual in the case of decision-making. Behavioral economics combines intuition, reasoning and reflection. It is scientifically proven that people act instinctively. However, financial actions should not be carried out in this way. Behavioral economics attempts to understand how investors react and why they act.
How can artificial intelligence help financial market participants?
A well thought out alliance
Thus, humans and machine learning can be combined within the hybrid model. Artificial intelligence is there to help collaborate, but also to make smart decisions. Whether for planning, writing, predicting and valorizing professions. Take email management for example. Thanks to artificial intelligence, automated processing could save time and put employees’ minds at ease. For arranging an appointment, changing the card limit, credit file, explaining fees or various complaints: artificial intelligence can handle it without blinking an eye. It will therefore allow people to focus on other less time-consuming activities with higher added value. In the banking sector, we talk about an “extended advisor”.
Towards financial market 2.0
With a robot properly fueled by technology, AI will be able to assist in decision-making in a rational way (going back to the famous cognitive biases). Using AI, it will be possible to supervise, contextualize, verify or correct the analyzes created. We are talking about productivity and efficiency. The purpose of using artificial intelligence in finance is to reduce the number of human errors. On the other hand, ethically, AI will never make assumptions, interpretations, or even demonstrate intuition. We are really talking about a person and their ability to adapt, as well as their emotional intelligence…
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