Do behaviour biases influence financial decisions?

  The COVID-19 pandemic is shaking and shaping up a new normal around the globe with challenges and innovations that we have never seen before coming to life. At one end of the curve, we have seen a lot of people being unemployed and struggling to pay for basic necessities like food, rent or mortgage. And at the other end of the curve, we have seen people and businesses innovating and digitizing their processes to minimize their expenses to earn a decent income.   Even though it is very soon to say how the pandemic will reshape financial decision-making moving forward, it seems like we all will be taking very cautionary decisions so that we don’t incur greater losses on our savings and investments. With all of this in mind, it is quite possible that your financial set-up (if any) does not meet your current lifestyle and needs. We have already seen people downsize their budgets, considering emergency funds, pulling out their retirement savings to meet their daily expenses, etc. and all of these actions may seem justified to us (and some are) but are there better decisions that could be made? The answer is Yes. And I could write many articles on the mechanics of personal finance — how to budget, use easy techniques to pay down debt, and perfectly allocate your retirement portfolio for age and risk tolerance. But most of you wouldn’t read it. It’s honestly very boring stuff and I would only be repeating what other writers have written about. In this article, I will write about how financial decisions are made and how we let a few biases influence our decisions. This has a lot to do with who you are: your personality, your environment, your friends and family. I need to do something! Back in those days (Pre-COVID), when driving back home from work, I usually find myself in traffic jams alongside Ngong Road. As soon as I see traffic building on this road, I often take other roads and you might have done this before to skip the traffic. Most of the time, this is almost very counterproductive as I end up taking a longer route, burning more fuel and also sometimes spending more time on the road if I get stuck somewhere. But moving and taking these “shortcuts” was more preferable than just sitting in traffic and doing nothing. This phenomenon is called “Action Bias”. Our natural emotion during unprecedented times or unpredictable times is to immediately take back control of the situation and act or do something. It doesn’t matter to us whether that action is a good idea or not. We should simply do something. This phenomenon is especially true in the finance world. When a crisis like COVID hit Kenya, it was quite natural for long term savers to abandon their investment strategy and pull out their savings or move their savings to less risky financial products. And this may not have been the best strategy. What should you have done? Stick to your investment strategy. As a smart investor, you would have carefully considered this risk in the first case. Even though a pandemic like COVID was highly unpredictable and could have not been factored in a financial plan. For now, talk to a financial expert. Make sure you have reliable sources for financial news. Take a drive through the not so busy Ngong Road. But do stay away from changing your investment strategy or consult an expert before doing so. I was right! Another phenomenon that clouds our judgement in financial decisions is known as confirmation bias. This occurs when someone interprets a situation according to their own pre-existing beliefs. A classic example of this is news on social media platforms. Social media users are faced with a lot of news sources, which vary in credibility. Fake news with their catchy headlines and unproven claims can become easily viral. Readers will read these stories which align with their pre-existing beliefs, and repost or share them on their social media, which spreads this misinformation even further. Warren Buffet, a very well-known and legendary investor, put confirmation bias in a very simple way, “What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” In the context of finance, confirmation bias can lead to poor investment decisions or choices. For example, let’s say there is an investor who has a good opinion of a company and chooses to invest in that company based on their opinion. The investor will selectively collect information, based on their opinion, to confirm that they were right in investing in that company. The company sees a fall in their stock price and yet, the investor’s bias will convince them that the drop is temporary and seek information to support their belief that the stock price will rise in the near future. And convince themselves that they are right. The problem with this is that the investor’s bias will keep convincing them that the stock price will rise and in reality, the company’s stock price may never rise. This bias is not immune to financial planners or experts, but financial planners are aware of this bias which normal investors may not be aware about. So, the tricks to breaking this spell is to seek guidance from skilled financial planners and experts and having a global view of what’s happening with your investments and listening to different points of view on your investments. In conclusion Yes, it is important to understand the mechanics of basic personal finance, but it is even more important to understand how we act, as people, in different or unpredictable situations. This pandemic is teaching us a lot about ourselves and the way we act or make decisions. The way we shake our hands, the way we work, the way we socialize is all changing and the same is likely to happen with our decision making for finance matters. We should all be cognizant of how we think and make decisions before jumping in or out investment products so consult a credible financial expert.  And yes, avoid falling prey to unsound or biased advice.

The Management of Accounts Receivables as a Crucial Corporate Finance Component

The management of accounts receivables as a crucial corporate finance component has attracted a lot of interest by board of directors during the current Covid-19 crisis. Studies done show this is a global challenge, with many manufacturing firms and distributors showing high levels of account receivables as compared to their total assets. In most cases, such receivables represent approximately 40% of a company’s current assets. Poor management of account receivables generally lead to challenges such as an increase in cash-flow problems thus disrupting the daily operations of the firms. The key outcome of this includes inability to pay employees, pay for supplied goods and services and meet other statutory obligations.

In Kenya, the situation is not so different as highlighted above and has led to collapse of institutions in key sectors such as Agribusiness (Mumias, Muhoroni and Miwani Sugar companies), Finance Sector (Imperial Bank and Chase Bank) and the Service Sector (Nakumatt Holdings). It has been observed that in most cases the credit controllers still insist in using the same tried and tested receivables management procedures with the result being limited liquidity to finance growth. However, the situation should not be all gloomy with the advent of Trade Credit Insurance. This insurance solution compliments the institutions credit control policy and ensures that despite having receivables, the company is guaranteed that the same will not turn out to be bad debts. In essence, this allows the organization to aggressively grow their sales by selling to existing and new customers on credit resulting to a growth in their P&L and long term financial stability.

The Trade Credit Insurance protects your business against both commercial and political risks that are beyond your control. It shields a company’s domestic and/or foreign accounts receivables from non-payment caused by the following: Protracted Default (non-payment past due date/ inability to pay), Insolvency (as provided for by legislation under the Insolvency Act 2015 -Section 236), Political Risk (such as currency inconvertibility, license cancellation, public buyer defaults). The structure of the cover could be on a Single Debtor Policy (insures only one key debtor), Key Account Policy (insure on a named basis as few as 3 accounts, all the way up to 200 accounts) or Whole Turnover (Insures all of a company’s sales).

Administratively, as a risk mitigation measure the insurer usually monitors the financial performance and well-being of your customers and allocates a grade that reflects the health of their activity and the way they conduct business. In the event that your client cannot or will not pay you, you will be insured and indemnified up to the limit of your policy.

Despite the above, it is important to note that the Trade Credit Insurance Solution doesn’t extend to cover default penalties, customer disputes with the buyer that may result in withholding of partial or full payments by the buyer, amount owed by any government entity which cannot be declared insolvent and currency fluctuation risks.

By Fred Muchina

Why You Need a Good Risk Insurance Broker

Optimizing on insurance can be an onerous task for any business, organization or even an individual. It is a balancing act between need and cost. That is why it is critical to get a strong team of experienced, professional consultants to help you through the process. Many professional indemnity/negligence claims arise from wrong advice of failure by your consultant to advise accordingly. The role of a broker/consultant constitutes of the following: – 1. Risk Profiling This entails understanding the nature of your business/operations to ensure that you get the correct covers in place, that give you the right kind of coverage. 2. Review and Gap Analysis A good broker/consultant will constantly review your risk as your business/organisation changes and advise on emerging risks, and changes that affect your insurances, such as laws (WIBA, Motor Vehicle Third Party Act, Finance Amendment Act, etc.) and developments (such as the impact of Covid-19), that are relevant to your operations, as well as availability of new products. 3. Cost Optimization Another key role of a broker/consultant will be to ensure you get the best value for money by balancing the cost and the quality of coverage. In some cases, organizations will just look at the cost at the expense of proper coverage. It is imperative that the broker/consultant highlight the pros and cons to a client, where the client has opted for a cover that the broker deems inferior. Another way a broker can save you money is by advising on covers that you may have in place that may have been taken by events, be outdated, or may no longer be required due to changes in law, business environment or needs. 4. Policy Review Your consultant will also advise of the implication of clauses, exceptions and warranties in the policy that may impact claim settlement. 5. Auxiliary Services Your consultant acts as your advocate in the event of a claim and other negotiations involving third parties. They also facilitate auxiliary services such as motor vehicle valuations and risk surveys. By John Nyaga

No health without mental health

Mental health is the psychological state of someone who is functioning at a satisfactory level of emotional and behavioural adjustment. It includes our emotional, psychological, and social well-being. It affects how we think, feel, and act. It also helps determine how we handle stress, relate to others, and make choices. Mental health is important at every stage of life, from childhood and adolescence through adulthood.

According to the W.H.O, Mental health is the state of well-being in which every individual realizes his or her own potential, can cope with the normal stresses of life, can work productively and fruitfully, and is able to contribute to her or his community.

We all go through mental health issues at one point in our daily lives, so no one is immunes to it. It is therefore important to be able to know some common Mental Health Issues/Illnesses. They may include the ordinary stress, anxiety, mood disorders, alcohol and substance abuse, panic and anxiety disorders, posttraumatic stress disorder, various addictions, depression, suicide and suicide ideation and not forgetting the effects of Covid-19.

A common mental health issue that we all go through and is highly ignored, is stress. Stress can be either good (eustress) or bad (distress). Stress can be defined as the body’s automatic response to any physical or mental demand placed on it. The question would be, are you able to identify the source of distress and resolve it?

There are various sources of distress, however the common ones include work, school, family, marital/relationships, finances, environment/living situation, prolonged unresolved issues, poor change management due to retirement, imbalance work-life, health/illnesses.

The body system has a way of warning us that things are not okay. The only problem is, do we listen? Some of the warning signs include; being overemotional, restlessness, irritability, restlessness, poor performance, mood swings (both male and female, yes, men do have mood swings), weight loss or gain, stress eating, increased alcohol and substance use, increased smocking, insomnia, muscular tension, skin outbreaks, constipation or diarrhoea, pessimism, hair loss, headaches, fatigue, burnout etc.

When driving in a super highway and constantly accelerating without stepping on the brake pad, you are bound to cause an accident. The same concept applies to our body systems. When do you remember to step on the body’s break pad?

The break pad in this case can be equated to an individual getting awareness that there is a problem, accepting that there is a problem and eventually seeking help. Help can come from use of body relaxation exercises like – deep breathing techniques, muscle relaxation techniques by use of stress balls, physical exercise, meditation, praying etc to bring a balance to the system, then dealing with the issue or seeking counselling. We all need help or support at some point in our lives.

The whole month of September and October 10th are very important months and day in the mental health calendar. The month of September is dedicated to suicide prevention which is classified under mental health illnesses, and October 10th is the World Mental Health Day.

Suicide is the deliberate and intentional act of killing self. Unfortunately, in Kenya, this is still considered a criminal act as opposed to a mental health issue. We hope that soon this narrative will change so that the individuals can receive the necessary help before they end up dying by suicide.

The warning signs of suicide may include; talking a lot about death and dying, isolating self, loss of interest in school, work or hobbies; giving away precious/prized possessions, has attempted suicide before etc.

These individuals are asking for help, so the help we can give is identifying the signs and assisting them in seeking the necessary help.

World Mental Health Day is observed on 10 October every year, with the overall objective of raising awareness of mental health issues around the world and mobilizing efforts in support of mental health.

Lilian Mwashuma – Psychologist.