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22 lacible | Mai 2015 FEATURE ARTICLE This is an unconscious process in which the brain filters information about available choices and organizes it to create a simplified version. To achieve this, the brain undertakes several operations: BEHAVIOURAL FINANCE IN FINANCIAL PLANNING After more than 25 years honing the know-how of financial planners in Québec, the IQPF intends to further advance the profession by acknowledging that the rational discipline that is financial planning has to bend itself to the human mould of intelligent beings who are nevertheless often irrational when it comes to economics. That's why the IQPF is embracing the branch of economics known as behavioural finance. This new field of expertise is often associated with investment, but its potential for application is far wider. Since people have to make financial decisions every day, understanding the client's decision-making process boosts the quality of the financial planning services we can provide. When we look at the results obtained by economics researchers over the last thirty years, it is easy to see the importance of including psychology in economic and financial theories. Not surprisingly, it is only by understanding how human beings make their financial decisions that we can offer solutions our clients can embrace with fully informed consent. The two dominant theories about the decision- making process in uncertain financial situations are prospect theory 1 and mental accounting. 2 Prospect theory divides the decision-making process into two phases: editing and evaluation. In this issue, we will focus on the editing phase, 3 the first part of the decision-making process. This phase allows us to analyze a vast quantity of information and make multiple decisions in very little time. Which route should I take to work this morning? What shall I wear? Which mutual fund should I choose? Operation Definition Example Coding* For each option, the possible results are classified as gains or losses, based on a reference point. The reference point is generally the net value or the value of an asset or a combination of assets (status quo). A Canadian investor who has to choose between a security valued in US$ and a security valued in CA$ might "code" the difference in the nominal value between the two securities as an immediate gain (or loss). Combination* One way to simplify each option is to combine the probabilities associated with identical results. Two 25% probabilities of winning $200 become a 50% probability of winning $200. Segregation* The risk-free component of a choice may be separated from the risky component. An option that offers the possible results of a $300 gain (80%) and a $200 gain (20%) becomes a certain gain of $200 + a possible gain of $100 (80%). Simplification* Rounding probabilities or possible results. A 49% probability of winning $101 becomes a 50% probability of winning $100. A 3% probability that the S&P 500 will drop by 40% becomes the impossibility that the drop will occur. Detection of dominance Rapid analysis of all options to detect those for which all possible results are at least equal and at least one is higher than the possible results of other options. All other options are eliminated. Take for example Portfolio A, which has a 45% probability of earning a return between 11% and 20%, and a 55% probability of earning a return between 0% and 10%. Portfolio B has a 45% probability of earning a return between –1% and 10% and a 55% probability of earning a return between 0% and 5%. Option B will be eliminated, since all its possible results are lower than A's. 1 D. KAHNEMAN et A. TVERSKY « Prospect theory: An analysis of decision under risk » (1979) 47:2 Econometrica 263. 2 R. H. THALER., « Mental accounting and consumer choice » (1985) 4 Marketing Science 199. 3 D. KAHNEMAN et A. TVERSKY « Prospect theory: An analysis of decision under risk » (1979) 47:2 Econometrica 263.

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