The Role of Economic Psychology in Financial Advising: Understanding Psychological Biases and Their Influence on Financial Advisors in Sweden

Abstract

The Russian invasion of Ukraine in 2022 resulted in significant financial disruptions, impacting global markets and leading to increased inflation and interest rates. This study investigates how financial advisors in Sweden navigate the current economic climate, focusing on economic psychology and the influence of psychological biases in the advisory process. Specifically, it explores advisors' awareness of biases such as overconfidence, risk aversion, the disposition effect, and mental accounting, assessing how these biases affect their recommendations and decision making. Through semi-structured interviews with nine financial advisors, the study analyses the extent to which SwedSec’s 2020 knowledge requirements on economic psychology have been adopted and their effectiveness in mitigating psychological pitfalls. The findings suggest a divided understanding of economic psychology among advisors, with many relying on standardized tools to avoid the influence of biases, though some advisors exhibit overconfidence and a reliance on mental accounting. The research highlights the importance of continuous education on behavioural finance to enhance the quality of financial advice, especially in times of economic uncertainty.